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Are Lloyds Banking Group PLC And GlaxoSmithKline plc Bargain Buys For 2016?

Lloyds Banking Group (LSE: LLOY) and GlaxoSmithKline (LSE: GSK) may beat the FTSE 100 this year, but both stocks look likely to end the year lower than they started. Will they bounce back next year?

GlaxoSmithKline: On the rise

Shares in Glaxo are now down by nearly 25% from the highs seen in 2013. In fairness, this weakness has been justified by the firm’s recent financial performance, which has been disappointing.

Glaxo’s post-tax profits plunged from £5.436bn in 2013 to just £2.756bn in 2014 as the impact of patent losses on key products affected sales.

However, the situation does seem to be improving. Glaxo has now completed a major asset swap with Novartis and last week announced a new deal to acquire additional HIV products. Analysts expect full-year profits to rise by 34% to £3.691bn this year, and by a further 11% to £4.099bn in 2016.

The firm has managed to avoid cutting its dividend so far and currently offers a prospective yield of 6.1% for 2016. Big long-term backers of GlaxoSmithKline, such as star fund manager Neil Woodford, have been buying more shares this year.

Mr Woodford’s view is that short-term headwinds are overshadowing the much greater long-term earning power of Glaxo’s portfolio. This is a view I share.

For investors looking for long-term income and growth, I think that now could prove to be a good time to buy GlaxoSmithKline.

Lloyds: Stock overhang

I believe that Lloyds investors are suffering from a problem that more commonly affects shareholders in small cap companies – a stock overhang.

The overhang comes in the form of the government, which is gradually pumping its Lloyds shares back into the market. Since the end of May, the Treasury has sold 9% of Lloyds shares. That’s equivalent to £5.2bn worth of shares at today’s price.

This means that big institutional buyers of the stock have been guaranteed a good supply of Lloyds shares, without pushing up the price.

However, the share sale has been paused recently as Lloyds shares have been selling below 73.6p. This is the price at which the government bailed out Lloyds in 2008. The bankers handling the sale have been told only to sell Lloyds stock when the price is above this level.

I suspect that this requirement means Lloyds’ share price will find support at around 70p, as the volume of shares available for institutions to buy is much lower now that the government isn’t selling.

However, I also suspect that Lloyds shares won’t rise much above 73.6p until the government has sold all of its shares, which it hopes to do in 2016.

That’s why I believe now could be a good time to buy. At today’s price of 72p, Lloyds offers a prospective yield of 5.1% for 2016, and a modest forecast P/E of 9.5. The shares are supported by a book value of 68p and by 55p per share of tangible assets.

In my view Lloyds currently offers more upside potential than downside risk, and could prove a profitable buy for 2016.

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Roland Head owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.