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Is There Hidden Value In Lloyds Banking Group PLC And J Sainsbury plc?

Volatile market conditions often present good buying opportunities for long-term investors. Stocks in sectors such as supermarkets and banking are currently trading at very low valuations, relative to their long-term averages.

For example, J Sainsbury (LSE: SBRY) shares are currently worth 16% less than they were 10 years ago, despite the firm being expected to report post-tax profits of £402.5m this year — more than double the £188m reported in 2005.

Lloyds Banking Group (LSE: LLOY) also looks increasingly cheap as a long-term buy, in my view.

In this article, I’ll ask whether both of these shares offer hidden value for buyers who can stay focused on the long view, and ignore current market volatility.

Lloyds

Lloyds’ share price has pulled back by around 16% from the high of 89p seen earlier this year. This has left this profitable bank looking increasingly cheap, in my view.

Lloyds currently trades on 2015 and 2016 forecast P/E ratings of around 9.5. The 2015 prospective yield of 3.4% is expected to rise to 5.3% in 2016. Lloyds’ price-to-book ratio, which was starting to look a little high, has now fallen to a fairly undemanding 1.15.

In my view, Lloyds is well on the way to regaining its credentials as a reliable high yield income stock. This could drive steady demand for Lloyds shares over the next few years.

However, the government is currently absorbing much of the demand for Lloyds shares by gradually selling its stake in the bank. Combined with current market conditions, this is probably keeping a lid on Lloyds’ share price.

Things could change once the government has completed the sale of its stake in Lloyds. Strong institutional demand for reliable dividend stocks could push the value of the Lloyds’ shares back up again.

In my view, Lloyds has the potential to outperform the market over the next 5-10 years.

Sainsbury

The supermarket sector is massively out of favour at the moment, but not all supermarkets are the same.

While Tesco has too much debt and too many unwanted overseas operations, Sainsbury does not. Sainsbury also has a firm foothold in the convenience market, where Morrison’s late entrance to this profitable sector appears to be running into problems.

In my view, Sainsbury is starting to look like the top quality buy among the supermarkets. The firm’s slightly premium brand seems to work well with shoppers and the firm’s valuation and yield are also attractive:

Ratio

Value

2015 forecast P/E

11.2

2015 forecast yield

4.4%

Price-to-book ratio

0.82

The supermarket sector is out of favour, but Sainsbury appears to be delivering a stable, profitable performance without any of the dramas that have affected its peers.

There is also scope for further cost savings. Along with selected store closures and other such efficiencies, one possible solution is that Sainsbury and Morrisons could combine some of their purchasing to gain greater negotiating power with suppliers.

In my view, now could be a good time for Sainsbury investors to top up for the long term, before the supermarket’s turnaround becomes too advanced.

Although Sainsbury and Lloyds both offer attractive dividend yields, both companies have been forced to cut or cancel their payouts in recent years.

If you need a more reliable dividend income, then you may be interested in the five blue-chip dividend names featured in "5 Shares To Retire On".

All five of the companies in this report maintained or increased their dividend payments during the financial crisis.

This report is FREE and without obligation, but availability is limited.

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Roland Head owns shares of Tesco and Wm Morrison Supermarkets. The Motley Fool UK owns shares in Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.