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Why I think Lloyds Banking Group could be the story stock of 2021

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I reckon this week’s action in the stock market gave us a glimpse into what could be a positive immediate future for investors. Indeed, the news from Pfizer about the progress of its Covid-19 vaccine programme prompted what American trader Mark Minervini described as a “hard” rotation of investors from Covid-winning stocks into cyclical recovery stocks such as Lloyds Banking Group (LSE: LLOY)

Lloyds Banking Group stock: could it lead a charge higher?

My guess is the black-and-white nature of the move could have been overdone in the very short term. It’s unusual for rotations in the stock market to happen as fast as this one. And I think the vaccine news may not be as decisive as the market has taken it – there could be a long road ahead before we are rid of the curse of Covid. However, the strength of the share movements this week demonstrates the pent-up potential of many businesses that the pandemic has been suppressing.

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I think the situation bodes well for a sustained recovery for many businesses and many sectors when the threat from Covid-19 does finally begin to recede. And it’s possible the banking sector will be at the forefront of the charge back upwards for stocks. Meanwhile, I’d consider Lloyds to be one of the leading players in what could be a leading sector. Indeed, I think Lloyds could be the story stock of 2021 with resurgent earnings and a rocketing share price.

I learnt from the books written by US investors Peter Lynch and David Dreman that banks stocks are usually the first into and the first out of recessions. And I only have to look at what happened after the last big event just over a decade ago to see the potential for Lloyds shares.

Back in the early spring of 2009, in the wake of the credit-crunch, Lloyds languished near 26p. But the stock shot up over the following six months to peak near 70p.  And that big and fast move shows what news of the first green shoots of recovery can do to a banking stock.

Balancing reasons to be cautious

Meanwhile, Lloyds is trading near 33.5p as I write – and rising. And conditions are just right for a repeat of the swing higher we saw in 2009. For example, earnings, dividends and the share price have all collapsed, marking what looks like a bottom to the firm’s trading cycle. And City analysts have pencilled in rosy projections for a robust, three-figure percentage resurgence in earnings in 2021.

However, we could see some more short-term volatility as the Covid-19 drama plays out and before a sustained move higher. And I’m also cautious about holding Lloyds for too long. Indeed, the six-month move in 2009 took the stock near to the top of a trading range it’s been locked in for more than a decade. And during that time, earnings were on the rise. However, the stock market, in all its collective wisdom, simply nibbled away at the valuation to cap the stock’s progress.

Indeed, by conventional valuation measures, Lloyds looked cheap for the past 10 years. But there was good reason for that – the risk to the downside was massive, as we’ve since witnessed! Nevertheless, I’d buy some of the shares today.

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Kevin Godbold has no position in any 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.