The pandemic-induced stock market crash in March 2020 was a crazy time for investors to navigate. Nobody knew to what extent the market could drop. Lloyds Banking Group (LSE:LLOY) stock wasn’t immune either. The Lloyds share price dropped significantly in a short space of time. But if an investor had snapped up some stock during the slump, here’s the return they’d currently be sitting on.
Running through the numbers
It’s unrealistic to assume that an investor would have perfectly timed the market and bought at the March lows around 30p. Rather, I’m going to say they could have bought at 40p in the middle of March. The stock had already seen a sharp decline from the 63p where it started the year.
If we fast-forward to today, Lloyds’ stock is 76.92p. This means the investor would have almost doubled their money over a period spanning just over five years. The exact return is 92.3%. The monetary benefit would depend on how much was invested.
Over the same time period, the FTSE 100‘s up 50.3%. Don’t get me wrong, this is still a great return if an investor went down the passive route and decided to buy a tracker index. However, the fact that the bank’s performance is almost twice as good shows how powerful active stock selection can be.
Reasons why
Someone might have decided to buy Lloyds’ stock during the crash for several reasons. To begin with, valuation. The price-to-book ratio, which measures the share price relative to the company’s book value, fell to 0.43. Typically, the ratio should be around 1 (which it currently is). The fact it was so low indicated that the share price was undervalued compared to the long-term view.
Another factor was the bank’s systemic importance. It’s the largest retail bank in the UK, so under the assumption that the Bank of England and the government would offer support to the economy, it was unlikely Lloyds would go bust. Granted, this wasn’t guaranteed. But a shrewd investor might have used this view to buy when others were selling.
Finally, an investor may have reasoned that interest rates would rise after the pandemic and return to a normal level. This did happen and was a key factor in helping to drive higher profitability for the bank in the past few years.
Looking ahead
Last month, the share price hit the highest level in five years. I don’t believe it’s undervalued anymore. With interest rates likely to keep falling in the coming year, I see this as a risk for the stock going forward.
It’s not that I believe the share price is going to plummet anytime soon. However I think banking stocks have enjoyed a great run, but now other sectors look more attractive to me. Therefore, I don’t see any immediate rush to consider Lloyds shares now, in contrast to the value offered during the stock market crash in 2020.
