Why I believe Barclays and Lloyds shares could double
Many UK stocks have suffered significant declines over the past 12 months. Nowhere is this more apparent than in the financial sector. Equities such as Barclays (LSE: BARC) and Lloyds (LSE: LLOY) shares have severely underperformed the rest of the market.
However, I think this could be an excellent opportunity for long-term investors. Indeed, while these businesses might have to grapple with some challenges in the short term, in the long run, I believe their size and competitive advantages will help drive growth.
Long-term investors
Here at the Motley Fool, we are long-term investors. That means we concentrate on a company’s underlying fundamentals, rather than letting short-term market movements drive our decisions. We also try to take advantage of the market’s short-term outlook.
I think this is something both Barclays and Lloyds shares are suffering from right now. In my opinion, investors are spending too much time concentrating on the risks these businesses face, rather than their opportunities.
This prevailing attitude has sent shares in both banking groups down to levels not seen since the financial crisis. Even though the stocks have recovered in the past few weeks, they’re still trading at deeply-discounted valuations.
Lloyds shares are cheap
Right now, Barclays shares are trading at a price-to-book (P/B) ratio of around 0.3. Lloyds shares are trading at a P/B of approximately 0.40. This might have been acceptable at the beginning of the pandemic as both businesses were reporting losses. Generally, if a company is losing money, that implies it’s shrinking.
Therefore, it doesn’t make sense to pay the book value or more for the equity. As such, at the beginning of the pandemic, a P/B ratio of less than one for both organisations would have been acceptable.
However, over the past 12 months, both Barclays and Lloyds have shown that the pandemic’s impact on their operations has been relatively limited. Both lenders reported significant losses in the first half of 2020.
But by the third quarter, the lenders had moved back into the black. Lloyds reported a pre-tax profit of £1bn in the third quarter. Barclays reported a net profit of £611m. Neither company has registered fourth-quarter results yet, but I believe it’s highly likely both groups will report a profit for the period.
On that basis, I think the shares look cheap from a valuation perspective. If Barclays and Lloyds shares returned to a P/B of 1, that would produce a return of more than 100% on the current share price.
What’s more, in the past few weeks, regulators changed their stance on bank dividends. They’re now allowing lenders to resume dividend payouts at an appropriate level. This suggests Barclays and Lloyds shares will become income investments once again in 2021.
Both have plenty of capital to cover any additional losses as well as pay shareholders a steady dividend. That’s another reason why I think the companies could be profitable acquisitions at current levels.
5 Stocks For Trying To Build Wealth After 50
Markets around the world are reeling from the coronavirus pandemic…
And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.
But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.
Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…
You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.
That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.
Click here to claim your free copy of this special investing report now!
Rupert Hargreaves owns no share 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.