How H&T Group plc Could Beat Lloyds Banking Group plc In 2016

At around 70p Lloyds banking Group’s (LSE: LLOY) shares are down 7.5% or so since January. Perhaps 2016 will be the year that Lloyds really takes off, maybe trebling again as it did during 2012 and 2013.

Maybe, but I’m not expecting it. At best, I reckon Lloyds will tread water just as it has over the last two years. At worst, Lloyds could slide further from here.

Struggling to grow

City analysts following the firm expect earnings to ease by 8% next year. That doesn’t look like anyone is expecting the company’s cyclical resurge in earnings to continue. Arguably, Lloyds’ profit recovery is done, and all eyes are now looking ahead for the next down-leg of the macro-economic cycle.

Growth looks set to be hard for Lloyds to achieve. The firm is focusing its attentions more on the market in Britain, just at the time when the challenger banks are gaining a toehold. I’m expecting the old nag to tick along for a few years with a more or less flat trading outcome. Meanwhile, Lloyds’ valuation seems likely to compress, as the market tries in vain to iron out the firm’s cyclicality. I say ‘in vain’ because there is danger to the downside from here — Lloyds’ profits and share price could collapse if the economy takes a dive.

With so little upside potential and so much downside risk, I’m looking for other homes for my capital during 2016 and beyond.

Trading well

I’m much more interested in FTSE AIM company H&T Group (LSE: HAT). City analysts following the firm expect earnings to grow 25% this year and a further 22% during 2016. What’s more, there is a rare reading of a particular valuation indicator on display — a price/earnings to growth (PEG) ratio of less than one. Anything below one indicates the possibility of good value for a growth firm, according to well-known growth investors such as Jim Slater and Peter Lynch.

Maybe the firm’s business puts investors off piling into the shares. The company earns its crust as a provider of pawnbroking and associated services, such as gold dealing and personal loans. Indeed, a look back at the five-year trading history reveals a record of volatile trading, so the recent profit surge seems more like a recovery than out-and-out growth. In that respect, I think it is unwise to place too much weight on the PEG ratio.

That said, H&T’s shares are up around 24% this year and the firm is trading well. Perhaps the company can achieve further progress during 2016 and beyond. One possible catalyst is that H&T appears to be mopping up in the market as other players withdraw from trading altogether.

Good value?

At today’s 197p, H&T trades on a forward price-to-earnings ratio of just under 11 for 2016. Meanwhile, the dividend yield is almost 4.6% and forward earnings cover the payout twice. This is an undemanding valuation, which could serve investors well if earnings hold up going forward. I’d much rather take my chances with H&T Group’s robust earnings than with Lloyds Banking Group’s lacklustre expectations.

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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.