Torn over the Lloyds share price? Here’s what I’m doing

The Lloyds share price is at an all-time low right now. Rachael FitzGerald-Finch asks, Is it a bargain buy or too much of a risk?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m admitting it. I’m flip-flopping over the Lloyds Banking Group (LSE: LLOY) share price. On the one hand, it’s really cheap right now. At only 26p per share at the time of writing, it’s very attractive.

On the other hand, London-based hedge fund Marshall Wace has taken out a huge £100m short position on it.

This means the fund is speculating a large amount of money on the Lloyds share price going even lower. And it’s quite a statement.

Lloyds certainly has its challenges. But, for an investor looking for bargain shares, the best time to buy them to maximise returns is when the market is bearish on them. Like it is now.

So, what to do?

Lloyds share price factors

Lloyds stock started this year around 60p. It halved in value over the first quarter and isn’t yet showing any signs of recovery.

But actually, for banking shares this isn’t unusual right now. Higher loan losses and interest rate cuts have hit the sector hard. Indeed, bank peers HSBC and NatWest are also struggling with similar capital problems.

Moreover, with the economy threatening potential rises in unemployment figures, capital gains are unlikely to occur anytime soon. This is true especially for Lloyds, which, as the UK’s biggest mortgage lender, will not want to see a housing market crash.

However, some economists believe that these fears are overstated. If they’re right, the Lloyds share price at 26p, priced at only half the bank’s net tangible asset value, may become very desirable.

And even if it doesn’t, if the bank ‘goes under’, shareholders could claim some cash back. Incidentally, the 0.5 price-to-net tangible asset per share ratio is similar to the bank’s position after the financial crash in 2009. And, notably, it recovered.

But I think this fear is groundless at the moment. The vast majority of Lloyds’ loans are backed by assets, its capital levels are good, and it’s set aside £3.8bn for bad debts. Moreover, at 6.1%, its return on equity (ROE) is higher than both Barclays and HSBC. This indicates its management is using its assets wisely.

The bank and Brexit

Curiously, one of the macroeconomic factors in Lloyds favour may be Brexit. Whereas there’s been much discussion of the negative impact of Brexit on financial services generally, its notable that Lloyds’ chair, Norman Blackwell, is a vocal Brexiter. Indeed, it was pretty clear to Blackwell that a free trade agreement would be on the cards pretty early on. And no doubt, the bank is planning for one. 

Moreover, depending on what is agreed between the UK and the EU, banks with operations inside the EU will be affected to at least some extent. But Lloyds, with 97% of its revenues coming from within the UK, has far less to worry about. Consequently, a ‘no-deal Brexit’ may be less of a problem for the bank than for its peers.

So, despite the risks, it’s unsurprising that other hedge funds, such as Chicago-based Harris Associates, are building their stakes in the bank. Lloyds, after all, is a cautious lender with a big market share and is in one of the better positions to ride out Brexit.

Lloyds stock is not without its risks. But, at 26p per share, I think they’re affordable. So, on balance, I’m buying.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rachael FitzGerald-Finch has no position in any of the shares 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.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »