Is the Lloyds share price ready to break out of penny stock levels?

Lloyds share price could indeed rise. There are risks, though.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Burst your bubble thumbtack and balloon background

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Let me just start out by saying that the Lloyds Bank (LSE: LLOY) share price has been at penny stock levels for a very long time. And by a very long time, I mean since a little after the financial crisis of the late-2000s. But just because it has not broken out of these levels in quite a while, does not mean it cannot rally now. 

Bullish forecasts for the Lloyds share price

Indeed, the most bullish analysts believe so. I just looked at the Financial Times’ compilation of forecasters’ share price targets. At least one of them, if not more, believes that in the next 12 months the stock will rise to 100p. In other words, it will cease to be a penny stock, which is defined as one at sub-100p levels. 

In fact, in a recent article I myself made a case for a potential doubling in the Lloyds share price based on three arguments. One, the house price boom continues in the UK. Lloyds Bank is the biggest mortgage lender, and could benefit from that. 

Robust results

Two, interest rates are on the rise, which is likely to improve the banks’ margins. The two arguments put together say that not only are lending volumes likely to be robust, the price charged for loans will be elevated too. 

It is little wonder then, that the bank reported better-than-expected income in the first quarter of 2022, since the time I wrote the article. And it even expects its net interest margin to rise by 10 basis points (bps) this year to 270 bps

Low valuations

My third argument was based on the bank’s ongoing abysmal valuations. At a price-to-earnings (P/E) ratio of six times, it is way below the FTSE 100 P/E of around 15 times. I can buy the argument that banks typically trade at earnings ratios below that for the FTSE 100. Even then, the Lloyds share price appears undervalued, however. Its P/E is still lower than the other UK-focused bank Natwest or even the more Asia-focused HSBC, which are both valued at almost 10 times. 

I have to point out here, that Natwest has reported a really robust set of numbers recently, which makes a case for it. But it did flip into a loss in 2020, which makes it a riskier bet for me at a time when the pandemic is not truly out of the way. The same was not true for Lloyds Bank. Also, HSBC is probably riskier too, given its focus on China, which is facing its own set of issues. 

What I’d do about Lloyds Bank

What I am trying to underline here is that there is clear potential for the Lloyds share price to rise from here. There are risks to the stock too, though. The threat of stagflation is on the rise, which means rising prices and little or no growth. This is bad for all sectors, especially for economy-linked ones like banks. 

On the whole, though, I am bullish on Lloyds Bank. Which is why it is already in my investment portfolio. Whether or not it rises to 100p or not.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Manika Premsingh owns Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »