I think value investing is a very nuanced strategy. I also think I could make significant profits from Lloyds (LSE:LLOY) shares in the short-to-medium term. However, as a Fool, short-term investing is not a strategy I like to employ.
I find I can get more reliable results from buying strong growth businesses at a good price than investing in really cheap, mediocre companies.
Lloyds shares look deeply undervalued to me. The stock also has a healthy dividend yield of 6%. However, the core business isn’t strong enough to make it a professional long-term value investment, in my opinion.
Instead, I think if I invested in Lloyds right now I would be trading on price. Unfortunately, I wouldn’t be purchasing the shares of a healthy business like Warren Buffett attests to.
Why the share price crashed
The Lloyds share price crashed 90% around the 2008 financial crisis.
During this time Lloyds performed a £12bn rescue takeover of HBOS. The acquired company had recently had a £10.8bn pre-tax loss.
There was also a scandal surrounding the company’s sale of Payment Protection Insurance (PPI). Compensation costs resulting from this reached £17bn by 2017.
The British Treasury even took a 43% stake in Lloyds post-2008. The government sold the last of their shares in 2017.
The positives of the shares today
I feel more confident investing in Lloyds when I consider its current 6% dividend yield.
If I was waiting for the share price to increase based on the low valuation, the dividends would provide some solace.
Additionally, the price-to-earnings ratio of the shares is currently around 4.5, which is in the top 15% of 1,400 banks. To some degree, I can see why some people are piling into the stock because of this.
On an even deeper level, the shares are trading at 0.6 times the value of tangible assets per share. That means if the company liquidated everything today, I would get nearly double my share price. That’s due to the value of material goods owned by Lloyds.
Is this really an opportunity though?
I’m not so sure investing in Lloyds is a good opportunity. Yes, the company’s share price could realistically double in the short-to-medium term because of the low valuation. However, there’s a significant risk in owning the shares over the long term.
The company does have some strong operational strengths right now. These include ethical considerations by attempting to support customers amidst the cost of living crisis.
The company’s one-year revenue growth rate is also 38%, which contrasts with its 10-year average of -1%.
The idea of investing in Lloyds leaves me conflicted. I reckon my shares could double in price over the short term. However, I’m not going to invest. I like to play the long game: I try to hold my companies forever or for as long as they remain great.
I just don’t think Lloyds is a great business right now.
