On Friday 11 October, the Lloyds Banking Group (LSE: LLOY) share price shot up more than 12% in just one day.
That’s an impressive and dramatic move. It was caused, it seems, by a change to a more optimistic tone from the main players in Dublin, London, and Brussels about the prospects of a withdrawal agreement for Britain’s exit from the European Union.
Is speculation driving the price moves?
Investors and speculators have been hanging on every word and nuance emanating from our politicians, I reckon. And, in a flush of enthusiasm, piled into ‘investments’ that they no doubt believe will benefit from a negotiated withdrawal agreement (WA).
Notable effects on Friday included the strengthening of the pound against other major currencies and a blip up in the shares for UK-facing banks including Barclays and Royal Bank of Scotland as well as Lloyds.
I have to say, I don’t share those speculators’ apparent view that the banks are the best vehicles for scoring advantage in the stock market even if a negotiated WA does lead to a better economic situation for the UK. Rather than looking at banks, I’d rather invest in other UK-facing business that run ‘proper’ businesses – making, selling, or providing products and services.
To me, banks are just facilitators and lenders of money and they ride the fortunes of the individuals and businesses they serve, skimming a living from other peoples’ efforts as they go. And that’s why banks are among the most cyclical shares you can buy. Indeed, bank stocks tend to be the first to plunge in a recession and can be early movers when the green shoots sprout on the other side.
A downtrend and elevated risk
So, the elevated Lloyds share price now comes with risks, in my view. What if the mood-music changes and it starts to look like the UK will end up leaving the EU without a negotiated WA? I reckon the pound will probably plunge back to where it was last Thursday along with the banks’ share prices.
And if we scope back on the Lloyds share price chart it’s clear that the trend has been down for some time. Even now, with shares at 57p as I write, the stock is down almost 35% in just over four years. Meanwhile, the valuation looks low with a small earnings multiple and a high dividend yield, and City analysts project flat earnings ahead, at best.
To me, Lloyds looks like it could be dangerously close to the top of its earnings cycle and the stock could just be marking time before the next cyclical plunge. Indeed, well-known one-time US fund manager Peter Lynch was known for trading cyclicals and he explained in his book, Beating the Street, that the most dangerous time to buy a cyclical stock is when its valuation is low after a period of strong earnings.
To be honest, I wouldn’t touch Lloyds Bank shares with a bargepole right now.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019