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Why Lloyds Banking Group plc is a dirt-cheap stock that could make you rich

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.

With the FTSE 100 continuing to break record highs, it may seem somewhat surprising that there are still dirt-cheap stocks available to buy. After all, a bull market tends to mean that the margins of safety on offer are relatively narrow, and this can lead to disappointing investment performance for new investors.

However, the valuation placed on Lloyds (LSE: LLOY) by the market is more reminiscent of a bear market than a bull one. Indeed, it appears as though investors are anticipating a very challenging period for the stock. This could present a buying opportunity for long-term investors.

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A tough future?

While the risks from Brexit are difficult to quantify, investors probably have two options when it comes to choosing how to deal with it. They can either seek to reduce their exposure to stocks which could be affected by Brexit in the hope of avoiding potential losses, or they could decide to use it to their advantage and focus on obtaining wide margins of safety. Clearly, the first option is less risky, but the second option may bring higher rewards if Brexit proves to be less intrusive in terms of its impact on the UK’s economy than has been forecast.

Since Lloyds is now almost exclusively a UK-focused bank, there are clear risks ahead. Already, sterling has weakened, inflation has risen and the UK’s economic growth forecasts have been downgraded. Yet Brexit is still 15 months away, which means things could get worse before they get better for companies that have major operations in the UK.

An investment opportunity?

While the outlook for Lloyds may be difficult to predict, the company’s valuation suggests that it offers significant growth potential. It is due to deliver earnings per share of 7.3p in 2018. At its current share price this puts it on a price-to-earnings (P/E) ratio of 9.3. A rating this low would normally be applied to a stock that is undergoing severe financial or operational difficulties. In the bank’s case, it continues to offer a relatively efficient business model as well as strong capital ratios. Therefore, it seems to be a worthwhile buy for the long term.

Growth potential

Also offering a low valuation at the present time is integrated services and investment banking provider to the shipping industry Clarkson (LSE: CKN). It released a brief update on Friday which stated that it is expecting to deliver results for the 2017 financial year that are in line with expectations.

Looking ahead to 2018, the company is forecast to record a rise in its bottom line of 20%. Despite this, it trades on a price-to-earnings growth (PEG) ratio of just 1. This suggests that there could be significant upside potential even after its 38% share price rise over the last year.

In addition, Clarkson appears to have income investing potential. It currently pays out around 60% of its profit as a dividend. This suggests that it could raise shareholder payouts by at least as much as profit growth over the medium term, and means that its 2.6% yield could rise in future.

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Peter Stephens owns shares in Lloyds. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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