These days, when scanning for bombed-out shares in the FTSE 100, there is no shortage of candidates. After all, with the Footsie down roughly 1,430 points (18.8%) this year, few shares have avoided steep falls.
Warren Buffett’s business wisdom
Furthermore, 33 years as an investor has taught me that falling share prices are good for buyers (but not sellers). However, before I’m tempted to buy any FTSE 100 faller, I ask myself this vital question: “Despite its plunging share price, is this still a sound business run by competent managers?”
This question was shaped by two wise comments from billionaire investor Warren Buffett. He remarked: “I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” And: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
This FTSE 100 share has taken a beating
If a FTSE 100 company’s share price has crashed, but it remains a sound business, then I’m eager to buy its shares. This is true even at the point of maximum pessimism. Take, Lloyds Banking Group (LSE: LLOY), for example, whose shares have taken a beating worthy of a world heavyweight boxing champion.
As I write, Lloyds shares trade at 29.36p, up 0.94p (3.3%) today. Over the past year, shares in the bank are down more than two-fifths (40.7%). Even worse, Lloyds shares peaked at 73.66p on 13 December last year, so they have collapsed 60.1% from their 52-week high.
Then again, the stock recently bounced back from its lows. On 31 July, just 12 days ago, the Lloyds share price dived to close at 25.43p. For me, this was a real bargain-bucket price for Lloyds. And its share price has since climbed 15.5%.
Is Lloyds a bad business run by bad managers?
Before buying its shares, I must ask: Has the Lloyds share price crashed because it has become a bad business run by bad managers? If so, then perhaps its ultra-low share price reasonably reflects this FTSE 100 company’s future prospects.
I can honestly say that, on balance, there is no reason to believe that Lloyds has become a ‘bad bank’. Unlike, say, in spring 2005, when I warned that Northern Rock and Bradford & Bingley had become rogue lenders selling ‘mad mortgages’ – and look what happened to both!
This FTSE 100 share can’t be valued on fundamentals
Of course, being a huge lender during the UK’s steepest economic decline for 300 years exposes Lloyds to huge risks. Before the coronavirus crisis is over, Lloyds might have to put aside maybe £10bn to cover bad debts. It has already set aside £3.8bn in loan-loss provisions for the first six months of this year.
But I’m absolutely sure that Lloyds will survive this downturn, because its balance sheet today is way, way stronger than during the global financial crisis of 2007–09. I happen to believe that, eventually, this FTSE 100 firm will return to profit and resume paying healthy dividends to its shareholders.
Finally, despite being the UK’s largest financial-services group, Lloyds has a market value today of just £20.1bn. For me, that’s too small for a decent business and market leader. I’d be a big, bold, brave buyer of its shares today for the long run!
