Although this has been a bumper month for the FTSE 100, the index has had a poor 2020. As I write, the FTSE 100 stands at 6,350 points, up almost 775 points (13.9%) since Halloween. This puts November on track to be the Footsie’s best month in its 36-year history. Nevertheless, the index is down almost 1,200 points (15.8%) in 2020, making this one of its worst years on record. Of course, during the Covid-19 crisis, some stocks have suffered more than others. Here are two cheap shares from the unloved, unwanted and undervalued banking sector that I expect to perform powerfully in 2021.
Cheap shares: Lloyds is deeply unloved
The cheap shares of Lloyds Banking Group (LSE: LLOY) have been so unloved in 2020 that I’d say investors hate them! Over the past 12 months, Lloyds shares are the 95th-worst performer in the Footsie. As I write, the Lloyds share price hovers around 36p, down almost two-fifths (39%) in one year. At their 52-week high, Lloyds shares peaked at 73.66p on 13 December 2019, but are below than half that level today. But things have been a lot worse: at their 2020 low on 22 September, Lloyds shares had crashed to close at just 23.59p. Ouch.
Why would I buy Lloyds stock today? First, because of its size as the UK’s largest retail bank, with 30 million customers (and a £25.2bn market value). Second, because Lloyds put aside a hefty £3.8bn in loss reserves in the first half of 2020. These bad-debt estimates now appear to be too high, which means huge sums could be released to shareholders’ benefit. Third, Lloyds made a £1bn pre-tax profit in the third quarter of 2020, as the UK economy bounced back from its spring lows. Lastly, when Covid-19 is under control, Lloyds will return to paying a juicy dividend in 2021. That’s why I’d buy these cheap shares today, ideally inside a Stocks and Shares ISA, to pocket tax-free cash dividends and future capital gains.
Barclays is also undervalued
Compared with Lloyds, Barclays (LSE: BARC) and its cheap shares have done somewhat better, relatively speaking. Over the past 12 months, Barclays stock is ‘only’ the 77th-worst performer in the FTSE 100. Today, the Barclays share price is 137.68p, falling a more modest 18.6% over one year. At their 52-week peak, Barclays shares hit a high of 192.99p on 16 December 2019. However, at their 52-week low during the March meltdown, they closed at a crazy 73.04p. Nevertheless, Barclays has struggled in late 2020, with its share price crashing to 91.55p on 25 September. Happily, it’s now more than half (50.4%) ahead of this low. So, why am I still a fan of Barclays today?
First, like Lloyds, Barclays is big. It has 24 million customers and a market value of £24.1bn. Second, Barclays put aside £3.7bn in loss provisions for the first six months of 2020. Again, this estimate could be too high, with released reserves flowing back to Barclay’s balance sheet. Third, Barclays owns a profitable and successful investment bank, which generated £1bn of pre-tax profit in the third quarter of 2020. Fourth, Barclays owns the eponymous Barclaycard, the UK’s largest credit-card issuer with 10 million cardholders. When the economy stabilises and consumers start spending and borrowing again, Barclaycard will be a primary beneficiary. Lastly, Barclays’ dividend will also return in 2021, helping to underpin its stock. That’s why I’d buy these cheap shares today, ready for the rebound in 2021!
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays 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.