In a similar way to most investors, I’m always on the look out for stocks that could potentially make me a millionaire. Here’s a quick spoiler alert — I’m not a millionaire currently. So I’m still very much in the game of finding high-quality companies that have a bright future. I think Lloyds Banking Group (LSE: LLOY) is one such firm with an attractive-looking share price right now.
The millionaire mindset
First, let’s run through what we need to identify in a stock in order to put it on the millionaire-maker shortlist. The big one for me is trying to buy when the market is selling. You can refer to this as a contrarian approach, in that I’m going against the tide. The truth is that often the market in general will overreact to any situation. This can be either by overbuying or selling a stock, which distorts it from a fair value.
When applying this to the Lloyds share price, it ticks the box. The share price is down over 50% this year. It has been pushed lower by the pandemic, weak consumer demand and low interest rates. So someone might look at the company and think that this isn’t a strong buy. But if you believe in the longer-term potential for the firm to bounce back (as I do), then this is exactly the distortion from fair value that warrants an investment.
After all, a move back to range of the past five years (50p-80p) would see a current investment return of well over 100%. When trying to become a millionaire, those are the kind of returns needed.
Why the Lloyds share price?
Other banks within the FTSE 100 index have taken a similar hit on share price performance. But Lloyds is arguably the most UK-focused bank in the index, and has seen a steeper fall. For example, the truly global bank HSBC is down around 36% this year. So even though the banking sector as a whole could be a good buy, Lloyds seems to me to be the real low-hanging fruit.
In a recent trading update, the bank said it has taken a huge £1.43bn hit for impairments on the credit and lending side. That means writing down/off the value of an asset (such as a loan). This reflects the potential for a lot of defaults or push-backs from businesses and consumers in the UK on loans.
But a lot of the fall in the Lloyds share price is pricing-in the worst case scenario. The impairment charge may be revised in coming updates, consumer demand may bounce back quicker than expected. The bank could benefit from government pandemic measures. Low interest rates could be spun into a positive. For example, it could allow the bank to push clients towards higher profit areas such as wealth management.
Let me just reiterate, the market can overreact and oversell stocks that offer good long-term potential profits. As for aiming for a million, buying low (from the market crash) will put you in a much better position than buying at record highs. Lloyds may not make me a millionaire on its own, but share price rises and an eventual return to dividends could help me get there.
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Jonathan Smiths owns shares in Lloyds Banking Group. The Motley Fool UK has recommended HSBC Holdings and 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.