As a value investor, I’m constantly on the lookout for cheap shares. However, thanks to the coronavirus crisis, the UK stock market is littered with ‘fallen angels’. These are successful firms whose share prices have collapsed, sometimes knocking many billions from company valuations.
Cheap shares: several banks fit the bill
Earlier today, I wrote about how Barclays shares jumped after it produced a much-improved set of quarterly results. Steeply reduced loan losses and higher revenues from its trading division saw the bank’s shares leap by almost a tenth from Wednesday’s close to Friday afternoon. Also, in what’s known as a ‘halo effect’, other UK bank shares rose on Friday in sympathy.
I have repeatedly written in the past that I view the stock of Lloyds Banking Group and HSBC Holdings as being cheap shares. However, there’s one big UK bank that I have yet to comment on: NatWest Group (LSE: NWG).
NatWest shares take a dive
As I write, just before Friday’s close, NatWest shares are trading at 122.65p, up 3.6p (3%) on a positive day for the FTSE 100. But NWG stock has crashed by almost half in the past 12 months, falling 47.5%. Even worse, at their 52-week high on 13 December last year, NatWest shares changed hands for 265p. Thus, the stock has plummeted 53.7% in just 10 months. That’s pretty unpleasant for the bank’s shareholders, to say the least.
Back in the spring meltdown, NatWest’s stock dived to 101.75p on 3 April, pushing it onto my ‘cheap shares’ watchlist. Then the stock rose steadily, hitting 137.35p on 5 June, since when it has weakened persistently. At its recent low of 90.54p on 21 September, NatWest’s share price had dipped 11% below its April trough. Ouch.
RBS is reborn as NatWest
NatWest is the same age as me (52), as we were both born in 1968. NatWest arose from the merger of National Provincial Bank (established 1833) and Westminster Bank (est. 1836). In March 2000, Royal Bank of Scotland acquired NatWest in a hotly contested takeover. The collapse of RBS during the global financial crisis of 2007–09 led to the mega-bank receiving a taxpayer bailout of over £45bn, with its ‘cheap shares’ being almost wiped out.
Ditching the now-disgraced RBS name, the group rebranded as NatWest in July. Today, the group operates under names including Royal Bank of Scotland, NatWest, Ulster Bank (in Northern Ireland) and various private banks including Coutts.
Cheap shares or value trap?
Right now, NatWest shares trade 35.5% above their September low. Yet the company has a market value of just £14.4bn, which is peanuts compared to the peak valuation of the group.
NatWest’s Q3 results are due out in a week’s time at 7am next Friday. Like Barclays, I think the bank will report steeply reduced Q3 loan losses, plus improved revenues at its trading division. Alas, its shares cannot be valued on forecast earnings (uncertain) and cash dividends (cancelled). Then again, given that this stock trades at roughly a 60% discount to its net asset value (NAV) per share, I can see ‘cheapness’ in it.
In summary, I’d buy and hold these cheap shares today for capital gains and a return to dividends. Also, buying them inside a tax-free ISA will protect future profits and cash payouts from the taxman!
