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 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!
