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Lloyds (LSE:LLOY) shares are down 13.9% since the beginning of the year. That’s considerable for a stock that doesn’t often demonstrate much volatility.
It’s worth noting that investors are clearly very risk-off when it comes to UK banks, and Lloyds in particular.
In 2023, the share price slumped following the Silicon Valley Bank fiasco, despite very little practical repercussions for UK banks, and it took a while to recover.
And in 2024, the selloff has been pronounced following news of a potential £2bn fine as the Financial Conduct Authority (FCA) investigates practices around motor loan commissions. Also, expectations of interest rate cuts were possibly premature.
So, is the selloff justified? Let’s explore.
Metrics look strong
Lloyds shares have an average target price of 59.3p. That’s around 45% higher than the current share price. So, why do analysts back this banking stock?
Well, I believe it’s always important to start with the figures and the metrics. These are the indicators that tell us whether a stock looks undervalued or not.
Despite the potential fine from the FCA, earnings are still expected to remain positive. For 2023, we’re expected earnings per share of 7.37p, 6.09p for 2024, and 7.03p from 2025. These figures appear to take into account the impact of the fine occurring in 2024 or 2025.
In turn, this means the business is trading just 5.5 times forward earnings. That’s phenomenally cheap. And beyond 2025, analysts expect earnings to pick up. In fact, the compound annual growth rate over five years is actually 7.57%.
This means, importantly, that the price-to-earnings growth ratio is under one, indicating that the stock is undervalued. In fact, the ratio is 0.68, inferring that the stock is significantly undervalued.
Waiting for momentum
Many UK stocks suffer from a lack of momentum. The UK economy isn’t dynamic, British companies are listing in the US, and investors sentiment isn’t particularly strong.
This is probably worsened by the ‘anything AI’ boom, with investors seeking out AI-related investments while passing on the solid investment opportunities provided by companies like Lloyds.
Just look at Arm Holdings, the UK-based US-listed chip designer. It’s up 88% since it listed in September without any outstanding results to push it upwards.
Momentum is an important part of investing. So while I hold Lloyds in my portfolio because I believe it’s significantly undervalued, I’m wary that it may take some time before it actualises its fair value.
As such, a significant and growing proportion of my investment, reflects the fact that momentum is actually one of the strongest indicators of forward share price movement.
By comparison, my investments in companies like Nvidia, Super Micro Computer, and Powell Industries have delivered growth in excess of 40% in a matter of months.
So, I’m holding on to my Lloyds shares, and if I had the capital, I may buy more. It’s certainly a bargain. Nonetheless, it’ll take a significant earnings beat, or interest rate announcement to get the share price to get moving in the right direction.
