It’s not much of a rally, but the Lloyds (LSE:LLOY) share price is up 9.6% over the past 30 days.
This essentially reflects the narrative that the economy, and therefore inflation, is weakening, but it looks like a hard landing will be avoided in the UK and the US. These are important details for a cyclical stock that’s very interest rate sensitive.
The stock would need to gain another 8% to hit 50p. So is it possible? And could it happen before the start of the new year?
Data is key
Economic data is vital when we’re investing in the current climate. That’s especially the case for banks which tend to reflect the health of the economy.
Investors may be concerned about the threat of a recession on loan quality, or the impact of these high interest rates on repayment affordability.
Both these concerns lead to defaults and more impairment charges, which can seriously hamper the bank’s earnings.
So it goes without saying, if I’m hoping to see the Lloyds share price push towards 50p, and potentially above in the coming weeks, the economic data will be key to that rally.
Valuation
In all honesty, if I’m asking whether Lloyds will hit 50p in the coming weeks, valuation probably isn’t that important.
Just look at Tesla. It’s been trading above target price, but still goes up and down according to broader market signals.
However, if I’m investing for the long run, which I am, valuation is very important. And this is where Lloyds looks incredibly attractive.
It currently trades at 4.8 times TTM (trailing 12 months) earnings, versus a global sector average of 10.2 times.
On a forward basis, Lloyds trades at 6.5 times earnings, far below the global sector average of 10.3 times.
In turn, this represents a 52.9% and 36.9% discount respectively.
But the real selling point, in my opinion, is the price/earnings-to-growth (PEG) ratio. This provides us with an earnings valuation that takes into account expected growth. A ratio below one suggests a company is undervalued.
Lloyds has a PEG ratio of 0.53, and that points to the company being undervalued by almost half.
In fact, Lloyds is the cheapest bank on the FTSE 100 using this metric and the second cheapest company on the index full stop.
Target price
Of course, there are still risks to investing in Lloyds. Default concerns will remain as long as interest rates remain as elevated as they are, and an economic shock could still happen, although it isn’t forecast.
I always like to look at share price targets to reinforce my own research. And here we can see that the Lloyds share price sits 33.1% below the average price target — 59.9p. This suggests there’s plenty of growth potential.
Combined with the juicy 5.2% dividend yield, this is why I’m continuing to top up on Lloyds shares. But will we see 50p before January? I’m not too sure, yet we may get close.
