Lloyds (LSE:LLOY) shares are down 10% since the beginning of the year, underperforming the FTSE 100, which has largely been buoyed by mining and resource stocks. I already own stock in Lloyds bank, but at 44p, I think now is the right time to buy more.
In fact, Lloyds has very attractive metrics and great prospects. That’s why I think Lloyds shares could double in value over the next five years. But, what would it take to reach 88p a share?
Valuation
I see Lloyds as a bit of an unloved share right now. And that’s reflected in its attractive valuation metrics. Lloyds trades with a price-to-earnings ratio of just six and a price-to-sales ratio of 1.7.
Moreover, Lloyds looks cheap compared to several of its banking peers. As we can see, only Barclays — also unloved — appears cheaper according to this metric.
| Stock | P/E ratio |
| Barclays | 4.6 |
| HSBC | 10.7 |
| Standard Chartered | 10.4 |
| NatWest | 10 |
It’s also worth noting that Lloyds doesn’t have unmanageable levels of debt — this would impact the share price and make the P/E artificially cheap.
Prospects
Lloyds is less diversified than its peers and that might be one reason for it appearing cheaper. The bank is Britain’s largest mortgage lender and 71% of its loans are mortgages. That exposure to property could appear risky.
However, I’m not so worried about exposure to property. Higher interest rates this year mean the bank’s margins will increase. It’s worth noting that historically low interest rates over the past decade are part of the reason that the Lloyds share price is so depressed.
And while some had expected that higher rates would put off house buyers, we haven’t really seen that happen yet.
In the long term, I’m bullish on demand for housing. Successive governments have failed to address the UK’s acute housing shortage.
I also like Lloyds’ decision to become a property owner. The bank is aiming to become one of the UK’s largest landlords by purchasing 50,000 homes in the next 10 years. This could be a very profitable move, as rental yields are likely to be greater than lending margins. I also imagine that Lloyds will get a better deal than me when it buys houses from Barratt Developments in bulk.
But as noted, Lloyds is very exposed to property and the forecast for slower economic growth could negatively impact demand for homes. I don’t foresee this lasting long, but there definitely could be some near-term pain. Inflation may also trigger more defaults, which wouldn’t be good for the bank.
Can I could double my money?
So, could I double my money with Lloyds stock?
To start, if Lloyds stock hit 88p a share tomorrow, and therefore had a P/E ratio of 12, it wouldn’t look much more expensive than some of its peers. So, I don’t think there needs to be a significant improvement in the financials.
But realistically, Lloyds would need to become more profitable. Higher interest rates could play an important part in that, and so could the move to become a landlord, which I expect will have good margins.
Overall, I’m very bullish on Lloyds shares and I’m buying more, expecting some considerable share price growth.
I really do think this stock is considerably undervalued, and in five years time, I wouldn’t be surprised to see it trading at 88p a share.
