The Lloyds (LSE:LLOY) share price is around half what it was before the March 2020 stock market crash. It certainly hasn’t rebounded with the rest of the FTSE 100 and for good reason.
Despite all this, it remains one of the most popular and most-traded shares on the FTSE 100.
So is the Lloyds share price low enough to recommend? Or is it a trap that will suck value out of your portfolio?
Weigh the anchor
Banks have rarely appeared so cheap. But the economic certainty that provides their backbone has rarely been so far away. With interest rates slashed to near-zero levels, there are fewer profits to be had from loans and mortgages. This is Lloyds’ bread and butter.
And seeing the share price at historic lows of around 30p reminds me of a particular phenomenon among investors.
It’s a commonly observed cognitive bias called ‘price anchoring’. Humans are predictable animals. We like our routines and our brains are constantly looking for shortcuts. So we tend to focus heavily on the first piece of information offered to us. Then all our buying decisions and predictions are made with that piece of data in mind.
This is what produces the illogical belief — consistently proven incorrect — that a share ‘can’t go any lower’.
Even if a company’s share price is at historic lows, it can certainly fall further. Just because in December 2019 the Lloyds share price was at 60p, it has no bearing on what it could drop to. In fact, in this case, the Lloyds share price has been consistently losing value since its May 2017 high of 73p.
You may not believe that one of Britain’s biggest high street banks could go bust and fall to zero pence. But it’s certainly possible for the share price to drop into the 20s.
The Lloyds share price is particularly sensitive to the UK economy. It gets most of its revenue from Britain, compared to rivals like Barclays or HSBC that are much bigger internationally.
So when all is not well on the home front, the Lloyds share price tends to suffer more dramatically.
And the forced suspension of its dividend — one of the bank’s biggest selling points — means new investors are likely to swerve it for now.
Coronavirus and the economic lockdown has produced a perfect storm for the bank. Chairman Norman Blackwell described in May how first-quarter profits had plunged by 95%.
Lloyds expects revenue generation from loan repayments to get worse, setting aside £1.4bn to cover the cost of bad debts as people struggle with unemployment on the other side of the pandemic.
And City analysts have put forward similarly dire warnings about the bank’s prospects.
On 25 June, broker Jeffries cut its price target for Lloyds, saying full year profits could be 10% lower than it previously thought. One damning statement said the Lloyds “revenue profile [is] ill-suited to current market conditions”.
Bargain FTSE 100 shares are sometimes that for good reason: their long-term outlook is not good and they may not have the financial stability to come out strongly.
With so many better options on the table, I would wait for more positive news before going anywhere near the Lloyds share price.
The post The Lloyds share price drops to 30p. Here’s what I’d do now appeared first on The Motley Fool UK.
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Tom Rodgers has no position in the shares mentioned. The Motley Fool UK has recommended 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 2020