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.
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.
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.
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.