Are Lloyds Banking Group plc And Trakm8 Holdings plc A Great Investing Combination?

Sometimes I find it a good idea to blend a few big-cap shares with smaller, higher risk and potentially higher return shares in my portfolio.

A steady big-cap can deliver solid dividend gains and maybe a little capital growth to firm up the foundations of my investment strategy, while a growing small-cap can spice up returns when the underlying business clicks.

With such a strategy in mind, I’m taking a look at Lloyds Banking Group (LSE: LLOY)  and Trakm8 Holdings (LSE: TRAK), to see if they can make a great combination when held together.

Lacking ‘defensive’ qualities

These two firms are at opposite sides of the size spectrum on the London stock market. At today’s share price of 73p, Lloyds sits in the FTSE 100 with a market capitalisation of almost £53bn. With a share price of 291p, Trakm8’s market capitalisation is a mere £82 million and the firm is a FTSE AIM share.

Based on size alone, Lloyds and Trakm8 measure up for this strategy, but I don’t think Lloyds has the safe characteristics I’m looking for to underpin my portfolio. The main problem is that the banking business is notoriously cyclical and banks’ profits, and their share prices, can rise and fall according to the tune played by wider macro-economic trends. As such, a bank such as Lloyds may not be the best fit in terms of ‘defensive’ characteristics for my two-pronged strategy.

I can’t deny that Lloyds is popular with private investors. The government’s plans to sell off part of its holding in the bank to private investors will keep interest bubbling, especially since the proposed deal involves a 5% discount to the market price of the shares. Then there’s a proposed 1-for-10 bonus share issued, capped at a value of £200 for those who go on to hold their new Lloyds shareholding for more than one year. However, that is all just ‘noise’ to me and will not be worth anything if Lloyds’ shares go on to plunge by 80% or more down the road. Such share price moves are common with the cyclical firms.

Lloyds’ shares have been essentially flat since early 2014 and I fear that situation might persist, even as profits continue to rise. The stock market seems to adjust for cyclicality during a macro-economic up-leg, such as now, by gradually compressing the valuations of cyclical firms such as the London-listed banks like Lloyds.  In order to thrive, Lloyds depends on a buoyant macro-economic environment. Meanwhile, growth seems set to be hard to achieve in the competitive banking landscape that prevails in Britain, and with the regulatory headwinds that persist. Such challenges are here, right now. So, when the next macro downturn arrives I don’t want to be holding a hand full of Lloyds Banking Group shares. I’m avoiding the firm.

Growing like mad

Trakm8 Holdings is a company enjoying success by providing fleet management solutions and vehicle tracking systems to organisations around the world. Growth has been brisk; with earnings rising around 900% over five years and the firm’s share price increasing by around 1800% over the period.

With earnings set to put on a further 40% year to March 2017, the growth taps still seem to be gushing. At today’s share price of 289p, the firm’s forward price-to-earnings ratio sits at just under 19. The big question when arriving late to a growth story like this is, will the company’s expansion continue. If so, the valuation is manageable. If not, a share purchase today could prove to be a costly mistake. One way around the dilemma is for me to put the firm on my watch list and wait for a temporary setback to knock down the share price before buying.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.