Warren Buffett has made a fortune for himself and his investors buying cheap shares. Lloyds (LSE: LLOY) shares are currently some of the cheapest on the London market.
As such, I think it’s reasonable to suggest that Warren Buffett could be interested in buying part of the lender to add to his portfolio. Today I’m going to explain why.
A Warren Buffett investment
Lloyds shares look cheap, but that’s not the only reason why I think the billionaire investor might be interested in the bank.
In the past few years, he has spent billions of dollars buying shares in US banking giants.
When he was asked why he liked bank stocks so much in an interview earlier this year, Buffett said: “The banks we own earn between 12% and 16% or so on net tangible assets. That’s a good business.”
So, how does Lloyds compare to this target?
Well, last year the bank earned an underlying return on tangible assets of 14.8%. By that logic, it seems as if the lender would qualify as a “good business,” according to Warren Buffett’s comments above.
As well as being a good business, Lloyds shares also look cheap.
They are currently changing hands at a price-to-book (P/B) ratio of 0.5. In comparison, some of the US lenders Buffett has been buying are trading at a P/B of 1 or more. This implies they are 50% more expensive.
Lloyds shares on offer
All of the above suggests that Lloyds could qualify as a Warren Buffett investment.
According to the billionaire’s own comments, the lender looks like a good business. It is also significantly cheaper than many of the other financial companies he has been buying for his portfolio recently.
That being said, the outlook for Lloyds shares in the near term is highly uncertain. So, this might not be the best investment for short-term investors.
The bank has warned that it may have to take billions of pounds of loan losses this year thanks to the coronavirus crisis. Low-interest rates could also weigh on profitability in the next few years.
Still, from a long-term perspective, the lender could be a good investment at its current valuation. Lloyds shares have also provided substantial cash returns to investors in the past as the company has returned any excess profits to investors via dividends.
When the current crisis is over, I reckon management will want to continue rewarding shareholders in this way.
The bottom line
All in all, I think Warren Buffett might be interested in Lloyds shares. As a long-term investment, the bank has a lot of potential, and today investors can snap up some shares in the group at a discount price.
However, there’s a high chance the stock might fall further in the near term as economic uncertainty grows. I think investors should look past this and focus on the lender’s long-term potential.
Rupert Hargreaves owns no share mentioned. 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.