Any successful investor looks beyond short-term stock fluctuations and focuses more on the longer term. When I refer to the longer term in this sense, I am speaking of five years or more.
The reasoning behind this mindset is that stocks may be priced away from their fair value in the short term. This can be due to market sentiment, when fear or excitement lead investors to overlook the fundamental value of a company.
From this in mind, when we look at the Lloyds Banking Group (LSE: LLOY) share price, what can we say about its longer-term fair value? Where might the share price be in five years?
Things we know
Let us take a look at the things we know today that we can use to make reasonable conclusions about the share price in the future.
The bank has been cutting down on costs and shifting strategy over the past few years, moving with the times regarding online and mobile banking. In 2020, another 56 branches within the banking group are set to close, taking the total to over 200 closures since 2014. The bank also recently announced a partnership with Microsoft as part of a ‘digital transformation strategy’ focusing on new cloud-based desktops, which should have a knock on impact for customers.
The bottom line as I see it that Lloyds is clearly well positioned for the changing banking environment. This makes me think that if the business is positioned well, the profitability will come naturally, which will have a positive impact on the share price.
Things we don’t know
When trying to forecast any reasonable period into the future we need to allow for external factors that will influence the share price and that are outside the control of the business itself. We call this systemic risk.
For Lloyds, arguably the largest systemic factor for the next five years will be the impact of Brexit. The government has until the end of this year to negotiate a trade deal with the EU and other nations, and financial passporting rights will be something of key interest for banks in the UK. Added to this is general sentiment from the public regarding Brexit, and as Lloyds is a retail-focused bank, its share price will be a barometer for this sentiment.
Putting this all together, I think that the digital strategy implementation will set up the share price for gains over the next five years. While we do not know what will happen with Brexit negotiations, the fact that there is now a majority party in power at Westminster should make the stalemate we saw for much of 2019 less of a problem going forward. I see no reason why in five years the share price cannot be trading around 90p, the levels last seen in 2015.
Jonathan Smith owns shares in Lloyds Banking Group. 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.