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Could Lloyds Banking Group (LSE: LLOY) shares be the best stock market buy right now? A lot of people might say no.
I mean, the Lloyds share price is still down more than 25% over the past five years. And that’s not exactly a winning result.
But here’s the thing. If we try to quess where a share price will go in the next five years, the past five years tell us nothing.
The past is no guide
Still, quite a few big investors make that mistake. You know, the professionals who should know better. But there’s one reason why they do it, which I think leads to exactly the wrong result.
Fund managers don’t like to be seen holding losing shares.
When new customers come along, who do they want to trust? Will they go for a manager whose stock market portfolio is full of shares that have dropped? Or will they prefer a fund packed with the winners of the past 12 months?
Well, I don’t want to buy shares that have gone up. No, I want the ones that look like the best value today. And that’s rarely the stocks that are on big valuations.
The smart money
Top investors don’t care what their stocks look like over the past 12 months. Or even over the past few years. I have people like Warren Buffett in mind here, the head of Berkshire Hathaway.
Since he took control in 1965, his average return has topped 20% per year.
Buffett’s success is down to just a few key things. He buys high-quality companies when their prices look good. And he buys stocks he’d want to hold for at least 10 years.
Is Lloyds the best?
Does Lloyds fit that bill? I think it does.
Investors don’t like bank stocks this year. But I’d say Lloyds is in very good shape today. Yes, it faces pressures.
But, thanks to new rules brought in after the last crisis, the Lloyds balance sheet is strong and liquidity looks fine to me.
I’d say the chance of Lloyds failing, like some poorly-run US banks did this year, is very low.
Set for recovery
I’m sure we’ll get back to growth, inflation will drop, and interest rates will come down.
So I remain bullish over UK shares in the long term. And for bank shares in general. When the economy is strong, how can the banks not do well?
And on today’s price, Lloyds is still my pick of the bunch.
Long-term value
Forecasts put the price-to-earnings (P/E) ratio at only around six for the next few years. That’s less than half the FTSE 100 average, which might be fair for a company in trouble.
But analysts see earnings growth at Lloyds. And they have this year’s 5.3% dividend yield rising as high as 7% by 2025.
Sure, Lloyds faces a tough time right now. And I see a risk of the shares losing more by the end of the year. But it’s still my pick of the Footsie.
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