Are Lloyds Banking Group plc, Investec plc and International Personal Finance plc value plays or value traps?

Should you buy or sell these three cheap financial stocks? Lloyds Banking Group plc (LON: LLOY), Investec plc (LON: INVP) and International Personal Finance plc (LON: IPF).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With Investec (LSE: INVP) trading on a price-to-earnings (P/E) ratio of just 9.8, it appears to be relatively cheap. However, cheap shares don’t always equate to sound investments since there could be very good reason for a low price and this could affect the company’s future performance.

In the case of Investec, the weak outlook for the South African economy is a significant contributory factor in the bank’s share price decline of 25% in the last year. While South Africa has huge long-term growth potential, it’s clearly enduring a tough period and investor sentiment in Investec could continue to wane. However, with the bank forecast to increase its earnings by 14% in the current year and by a further 12% next year, it seems to be in good shape and set to perform well.

Due to this, Investec could prove to be a value play as opposed to a value trap. Therefore, for long-term investors who can live with a degree of volatility in the short run, Investec could prove to be a sound buy.

Low valuation

Also trading on a low valuation are shares in International Personal Finance (LSE: IPF). They have a P/E ratio of just 8.7 following their fall of 46% during the course of the last year. The main reason for International Personal Finance’s share price fall is concern surrounding the lending market, with the prospect of higher interest rates over the medium-to-long term having the potential to not only increase default rates as mortgage costs and other debt servicing costs rise, but to also reduce demand for borrowing.

Despite this, International Personal Finance is expected to report a rise in its bottom line of 12% in the next financial year and this puts it on a price-to-earnings growth (PEG) ratio of only 0.7. Therefore, while the risks are relatively high, International Personal Finance could offer upside potential for less risk-averse investors if it’s able to deliver on its upbeat earnings forecasts.

Long-term play

Meanwhile, Lloyds (LSE: LLOY) is also trading on a super-low valuation. It has a P/E ratio of just 8.3, which, when Lloyds’ diversity, efficiency and asset base is taken into account, is very difficult to justify. Certainly, its bottom line is expected to fall in the current year by 11% and then grow by just 1% next year, however Lloyds is also set to return to public ownership and make further progress on its turnaround strategy.

Both of these factors could act as positive catalysts on Lloyds’ share price and while UK house prices and the wider performance of the UK economy are risks to investors in the bank, its current valuation appears to factor-in such potential challenges. Therefore, while Lloyds may currently be viewed as a value trap following its share price fall of 28% in the last year, it could prove to be a top-notch long-term value play.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Lloyds Banking Group. 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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »