US analyst Thomas Lee predicts a big rally in beaten-down shares on the stock market – soon! But he’s not the only investor expecting stocks to stage a recovery. Most of us reckon businesses will turn up at some point – why else would we buy cheap shares?
Lee’s analysis of the imminent timing of an upsurge in the markets hinges on Covid-19 infections peaking around the world. He thinks we’re about there, and lagging stocks will surge as infection rates fall.
The shares look cheap
If he’s right, we could be seeing a fleeting window of opportunity to buy shares in Lloyds Banking Group (LSE: LLOY) below 30p. As I write, the shares change hands at just over 28p, and the company sports some tasty-looking value metrics.
For example, the price-to-book ratio runs near just 0.4. And the price-to-free-cash-flow ratio is about 0.8. Looking ahead, City analysts following the firm expect a rebound in earnings during 2021 of just over 350%. That puts the anticipated earnings multiple a little under eight. It’s hard to make a case for the valuation being too demanding. Although the bank has halted dividend payments for the time being as required by the regulators.
However, the dividend will be back. As will earnings, revenues cash flow, and everything else desirable in a stock. That’s how cyclical businesses behave. Earnings cycle up and down along with share prices and dividends. And you’ll be hard-pressed to find a business more cyclical than a bank.
The big question is, when? To me, Lloyds looks more attractive now than it has for years. Earnings, the share price and the dividend have all collapsed. Theoretically, that’s the best time to buy any cyclical stock in anticipation of the next cyclical up-leg. And if history is anything to go by, the upsurge will be rapid when it comes.
Will history repeat?
Just look at what happened to Lloyds in 2009 after the credit crunch – it soared almost 200% over just a few months. And it rose from a similar level to what we’re seeing now. If Lee is correct and beaten-down sectors rebound strongly soon, it’s hard to imagine Lloyds being left behind.
Indeed, banks are known for being the first in and the first out of recessions. So, if economies continue to pick up and trading goes well for fallen sectors, Lloyds could be one of the stocks leading the charge higher. And there would be decent fundamental support from the underlying business — when the bank’s customers are doing well, Lloyds does well. And it also benefits when stock markets are buoyant.
However, the main risk is things could get worse before they get better. It’s not hard to imagine Lloyds plunging another 50%, say, from where it is now if we see Covid-19 bubbling up again and causing more lockdowns. If you buy shares in Lloyds now, you must carry that risk.