The stock market crash of 2020 ended the longest equity bull market in history. As we begin a new economic cycle (likely characterised by a looming recession) it’s worth casting our gaze further out. For example, thinking about where the Lloyds Banking Group (LSE:LLOY) share price could be in five years’ time.
This is important because right now, the Lloyds share price is volatile. The share price was down around 15% last week, compounding a fall of over 50% year to date. But volatility often presents opportunity, especially when you’re buying for the long term.
A good starting point is looking at some fundamental measures of the worth of Lloyds. One metric I like to use is the price-to-book ratio. This measures the market value versus the book value of a company. The market value is simply what investors think the company is worth, whereas the book value is a tangible number that shows the net asset value. In theory, the ratio should be one, in that the actual value of the business is the same as investors’ perception of it. Yet it doesn’t always happen like this in real life.
For Lloyds, the ratio is 0.52. This means the share price reflects only half the actual value of the net assets for the business! Now you can argue that with bad debt and loan defaults from the pandemic, liabilities will likely increase for the bank. But is the business really worth half the net asset value? I think not.
So using fundamental analysis, I’d say in five years time the Lloyds share price should move closer to a 1-to-1 ratio. If the net assets stay the same, then this would see the share price double to around 65p.
The other side of the coin when trying to predict share price movements we have technical studies. These look more into charting and past price patterns when trying to predict where a share price will be in five years time. A good example is the Relative Strength Index (RSI). It measures how overbought or oversold a share price is from past prices. It’s a scale from 0-100, but anything below 30 is oversold, and above 70 overbought.
The Lloyds share price reached the lowest RSI level in years back in the middle of March when it hit 18. It has recovered a bit back up to the mid 30s, but still a long way off from a middle-of-the-range reading. By comparison, the last RSI reading of 50 (fair value) was in January, when the share price was around 60p.
From this we can conclude that if the technicals return to a fair value level over the next five years, then this should put the share price back at circa 60p.
Lloyds share price, buy now?
So if fundamentals suggest around 65p is a fair price, with technicals not far behind at 60p, should I buy more now? Well it does look attractive from my point of view. Buying at current levels just over 31p could be a solid longer-term play, reaping large profits for shrewd investors.
The post Where could the Lloyds share price be in 5 years’ time? appeared first on The Motley Fool UK.
Jonathan Smith owns shares in Lloyds Banking Group. 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