Why it is so cheap?

We are travelling in France this week. It is sad to see the huge fire damage to Notre Dam. We visited it over 20 years ago and thought to revisit it again but it got burnt badly before we get the chance. Hope it can be restored soon to show its original beauty again. Now back to my idea today.  

These days it is really challenging to find anything cheap. The market sentiment is widely euphoric and complacent and it seems nothing can stop it from making new highs one after another. The big question is how much this rally with new highs is really sustainable. I doubt very much but I have been questioning this for many weeks now. So I better just keep quiet and watch. But today, I can share with you a mysteriously cheap stock which is brought to my attention from my source and I indeed feel this one is worth considering. It happens to be an European stock that I'm talking about while I'm here in Eurpoe. Probably not many of you based in the US have ever heard about it but it is one of the largest banks actually. It is the largest bank in the UK, Lloyds Banking Group (LYG).

Here is some information about LYG.  Lloyds Bank plc is a British retail and commercial bank with branches across England and Wales. It has traditionally been considered one of the "Big Four" clearing banks. The bank was founded in Birmingham in 1765. It expanded during the nineteenth and twentieth centuries and took over a number of smaller banking companies. In 1995 it merged with the Trustee Savings Bank and traded as Lloyds TSB Bank plc between 1999 and 2013. So it has nearly 300 years of history in the banking services in the Europe. It employs roughly 68,000 people across the world as part of an international financial network that's valued around $60 billion. So by any means it is definitely not a small potato. But can you guess what is its stock price traded here? Unbelievably it is in the group of so-called penny stocks, i.e. those with share prices less than $5. LYG is trading in $3! Penny stocks are in generally not touchable by institutions and generally mean high risks involved. So this is a mystery for me why it is so cheap stock price-wise. You can very well argue low share price does not necessarily mean cheap in valuation. Indeed this is true and that’s why I want to further dig into its financial stats a bit to see if it is really cheap as it looks like. Here is some info I have got, which to me is quite encouraging for LYG. As with any banks in the world, the 2008 financial meltdown has caused a great deal of pain for them, including LYG. It had a major and complex merger done in 2009. After a few years of struggling, it appears Lloyds has delivered a significant turnaround for its shareholders. LYG has grown its profits every year since 2015, raking in a massive $5.3 billion in 2018, a 536% increase over its 2015 bottom line. It seems there is no sign of slowing down as it is growing earnings by 20% over the last two years, 29% growth between 2017 and 2018! Even with such an impressive growth, it is still trading with a PE of 11, 40% lower than the industry average of 18.6. Even better, it is paying a massive dividend with a yield of 4.9%. Except for the few years around 2008, it has been a pretty reliable dividend paying stock.

So based on what I can see, LYG indeed appears to be cheap and attracting in this widely expensive market and I still cannot really figure out why it is so cheap for such a major bank with good fundamentals. Maybe it is related to its location. After all, EU is a big mess for many years and UK is especially in a messy divorce battle with EU, the stupid Brexit. All this has created a lot of uncertainty for the market. But as a contrarian, I think this may have created a great opportunity for something solid but cheap. LYG may just be one of such. Keep in mind though. Don’t simply buy just because I talk about it here. This is still a risky speculation for me. As cheap as it looks like with good dividend yield, I will still not treat it as a safe long term investment for me. But rather, it is more a trading candidate that I expect it may shoot up in the near future when others start to recognize its values. It is also part of my global diversification and I think EU may outperform US in the next few years simply based on the sentiment and valuation in general from a contrary perspective!