If you’ve been watching the Lloyds Banking Group (LSE: LLOY) share price and looking for a good entry point, it may have arrived.
From a valuation perspective, the stock has a lot going for it right now. Indeed, through 2019, earnings plummeted. And City analysts predict massive further falls in profits during 2020. The forward-looking earnings multiple is almost 19, when measured against expected 2020 earnings.
The valuation indicators have lined up
That’s much higher than the single-digit rating we’d previously become used to. And that’s a good thing if you’re looking for value in an out-and-out cyclical stock. Indeed, a high rating after a plunge in earnings and a fallen share price is what we should be hunting for.
Meanwhile, the price-to-book value is just below 0.5. That’s also a good indicator of value, suggesting we could be near a cyclical bottom for the business. And I’m also encouraged by the consolidation on the share price chart now that it looks as if it could be trying to turn up. After plunging in February and March, the stock has been bouncing around and trading broadly sideways ever since. Indeed, it could have found its bottom in the current cycle.
Those City analysts are certainly optimistic. They’ve boldly pencilled in a treble-digit recovery in earnings for 2021. And I’m encouraged by the situation on the ground as well. Lockdowns are lifting, and we’ve yet to see a meaningful second peak of Covid-19 anywhere in the world. Summer is here. Perhaps we’re on the way to winning our global battle against the virus.
And governments everywhere seem determined to ensure the crisis of the pandemic won’t be followed by an economic crisis that crushes us. They’re throwing everything at the problem, including the search for a vaccine. But some investors fear a second stock market crash because of the recession we’ve entered.
The market moves to confound the many
However, the higher the number of people fearing a second crash, the less likely it is to happen. Why? Because that can be a ‘thing’ with the stock market, and I can’t fully explain it. But time and again, I’ve seen the stock market move to confound the expectations of the many.
So, perhaps those City analysts’ expectations for a sharp rebound in Lloyds’ profits next year will prove to be correct. The share price looks like it wants to shoot up to me. I think the move could be rapid because bank shares tend to be leading indicators – first into and first out of recessions. If you wait until we see recovery in the real-world economy, it’ll likely be too late for buying shares in Lloyds Bank.
However, I wouldn’t attempt to buy and hold shares in Lloyds for the long term. Although this could prove to be one of the most attractive buying points in years, as ever, we won’t know for sure until later. There’s no certainty when investing in cyclical shares.
