Penny stocks, particularly at the lower end of the price range, tend to be smaller companies and are thinly traded. As a result, they can be swayed by larger trades. But that’s not the case with Lloyds (LSE:LLOY). This banking giant is a stalwart of the FTSE 100 and I feel this share could soar.
Why is Lloyds trading in pennies?
Lloyds TSB, as it was then, became Britain’s most profitable bank and a darling of the stock market in the 1990s after takeovers, cost efficiency and massive returns for investors. The stock traded at around £4 to £5 for a while. But the banking giant hasn’t been above £1 since the financial crash and, for me, it’s probably not going to cross that landmark any time soon. Having said this, some forecasters have suggested that Lloyds will cease to be a penny stock in the next year.
I’m not sure about that. But just because I think it’s not going to reach £1 a share from its current 46p, doesn’t mean I’m not bullish on Lloyds. Here’s why I think it could jump!
It represents good value
For a start, I think it’s cheap with a price-to-earnings ratio of just 6.1. This is not the P/E ratio I’d expect for a firm with good long-term prospects.
In late April, the bank published its Q1 report and it was positive. The lender reported pre-tax profits of £1.6bn, down from £1.9bn a year ago, but beating the average forecast of £1.4bn. Lloyds attributed the year-on-year fall to a £177m charge meant to protect the bank from potential defaults linked to the inflationary pressures. Prices rose by 7% in March, posing a threat to credit repayments.
The Q1 results followed a strong showing in 2021. Net income rose to £15.8bn, a 9% increase. Underlying net interest income increased to £11.1bn, a 4% rise. Profit fell just short of analysts’ forecasts at £6.9bn.
Strong prospects
Lloyds is heavily exposed to UK property, being the country’s largest mortgage lender. And I think that’s a good thing. Long-term demand for homes looks strong as successive governments have failed to address the imbalance between supply and demand. And that’s reflected in house price data. According to Office for National Statistics data, average UK house prices increased by 10.9% over the year to February, up from 10.2% in January.
I’m also interested in Lloyds’ decision to become a property owner. It wants to purchase 10,000 homes by the end of 2025 under the brand name of Citra Living. Over the next decade, the bank plans to buy 50,000 homes, according to reports. An estimated 183,000 new homes were built between June 2020 and June 2022. So it’ll be interesting to see if Lloyds purchasing 5,000 a year will impact house prices.
However, I think there could be some short-term pain in the housing market due to higher inflation, the cost of living crisis and higher interests rates. This disruption could hurt business and revenue in the short term. Rate rises also lead to higher margins for lenders, so it could work both ways.
Should I buy?
With all that in mind, I’ve already bought Lloyds shares and I’m looking to buy more.
