If you are investing with a long-term view somethingwe avidlyencourageon the Fool the short-termism of the wider stock market can take you by surprise.
I was certainly taken aback by just how negatively markets responded to last weeks third quarter results from Lloyds Banking Group (LSE: LLOY). Investors didnt like what they saw, yet it did little to dent my view that this is one of the most attractive stockson the FTSE 100 right now.
Foolish investors should be primed and loaded to take advantage of opportunities like these, when the market has come down too hard on a stock with untapped potential. Thats if you agree with me, of course.
LLOYs Own Story
Lloyds delivered underlying profits of 6.35bn in the first nine months of 2015, up 6%year-on-year. Markets were disappointed thatthis was mostly down tocutting costs than boosting income, which was disappointingly flat over the period at 13.20bn. They also didnt like the fact that Lloyds was forced to make another 500m of provision for PPI mis-selling. This is the scandal that doesnt die, and Lloyds has been thumpedharder than any other bank.
Itwasnt all gravy but there was still plenty of sauce inthere. Thecommon equity tier 1 ratio is now a chunky 13.7%, up from 12.8% on 31 December 2014. Total capital ratio is 22.2%. Thisputs Lloydsin a strong position to dish upmore of its future profits toshareholders. Lloyds is now generating a return on required capital of over 15%, which should support its generosity.
Fretting over PPI when there is so much to feel content about seem short-termist to me. The Financial Conduct Authority will eventually put a time limit on claims, which may speed upactivity in the short run, but liberate Lloyds thereafter. Investors should also cheer the low level of bad debts. These may be artificially suppressed by todays rockbottom interest rates, but given the glacial speed at which ratesare likely to increase, few are expecting a surge in bad debts from here.
As a simple, low risk, customer-focused, UK retail and commercial bank operating in a mature market, this is no whizzygrowth stock, thats for sure. The rise of the challenger banks will clip its wings. With Lloyds trading at below 75p, it could take some time before it joinsthe 100p club, but iteventually will.
The big attraction lies inits income prospects. Lloydsmay be yielding just 1% today but that is forecast to hit 5% by the end of next year.The banks capital strength suggests there is scope for further shareholder rewards in the shape of buybacks.
The market may be shunningLloyds todaybutthat is the best news of all today you can buy it at just 9.19 times earnings. Some may wish to wait until next Springs discounted retail investor flotation. The danger is the markets may have woken up to Lloyds potential by then.
There areplenty more top UKstockson the FTSE 100 if you know where to look.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.