Stock market crashes are never nice. Extreme volatility, economic damage and shareholders losing money is no laughing matter. But they do create buying opportunities for long-term investors. For those scouting out bargains in today’s climate, Lloyds' [LLOY] share price could be one to watch.
The bank's share price has fallen harder than most following the coronavirus outbreak. It also failed to benefit from the wider revival in the FTSE 100 rally that started in March. This has meant Lloyds’ share price is still trading at a discounted level from the start of the year. So, is now the best time to buy Lloyds stock, and if so, how long can investors expect to wait before seeing profits?
What's happening with Lloyds’ share price?
Lloyds’ share price has gained almost 8% over the past month. There are a couple of possible reasons this might have happened. They could be experiencing some delayed upward momentum from the Spring rally in March, making them rather late to the party. Alternatively, Lloyds’s share price may have simply been oversold at the beginning of the coronavirus outbreak.
Despite these positive signs, June's rally in Lloyds’ share price, which is currently trading at circa 32p, seems to be cooling off. As with any key component of the UK economy, Lloyds’ share price is sensitive to any fresh economic shifts. Given that data has been dire recently, with UK GDP falling 20.4% in April, it's no surprise that recent rallies have been short-lived. As the economy improves, however, more encouraging data could help to support a longer-term rally for Lloyds.
Lloyds' share price gains over June
Why Lloyds’ share price could be a bargain
This latest dip could represent a buying opportunity for traders betting the economy will recover in the long term. Lloyds’ share price is down 50% since the start of the year and since March has failed to break through the 40p level, even with a couple of rallies. Despite this, there’s a lot still to like about the bank.
Lloyds has streamlined its business to maximise efficiency, leading the pack in online banking. Changes in regulations following the 2008 financial crisis also mean Lloyds has had to set aside a cash buffer to withstand future market crashes.
In 2019 Lloyds saw its net income fall 33.64%, from £4.4 billion to £2.93 billion. This drop came despite a 60.7% increase in revenue, taking the total from £31.42 billion to £50.50 billion. The bank’s obligation to pay out large sums when settling PPI claims is the main reason for this drop in net income, but with the PPI deadline well in the past, this won't be a problem for Lloyds going forwards.
Why Lloyds’ share price might not be such a good deal
As ever, though, there are some thorns among the roses. As the UK's largest mortgage lender, Lloyds is likely to see an increase in defaulted payments resulting from lockdown-related financial pressures. Likewise, its business lending operations will come under pressure if businesses go bust. While the UK government has been supporting workers and companies so far, it is already beginning to taper its support schemes. This could see a further increase in the number of people and businesses struggling to pay back loans. The bank has already set aside £1.4 billion to cover these losses, but it may well need to find more in the coming months.
Amount set aside by Lloyds to cover losses
So, time to buy Lloyds?
If the economy makes a swift recovery, then Lloyds’ share price should see an eventual rebound. That said, the headwinds it faces are significant and outside of the bank’s direct control. Thus, for investors looking for a bargain, patience – as well as a high pain threshold – will no doubt prove vital.
Of the 23 analysts tracking Lloyds’ share price on the Financial Times, 14 rate it either a Buy or Outperform. An average price target of 40p would see a 26.4% upside on the current share price valuation (through 22 June’s close).
From a technical perspective, resistance looks to be around the 38p mark. Both June and April's rallies were knocked back to around this level. Support looks to be around the 28p mark.
For the bargain hunters out there, Lloyds could well be a stock to consider picking up. Be aware, however, that any profits will likely come in the long-term, with some twists along the way. Patience will be key and the share price could remain low for some time to come, so those seeking short-term gains might be better off looking elsewhere.
|PE ratio (TTM)||14.10|
|Quarterly Revenue Growth (YoY)||-35.10%|
Lloyds share price vitals, Yahoo Finance, 23 June 2020