Oakmark Funds Believes Lloyds Banking Group (LYG)’s Shares are Undervalued

Oakmark Funds, a long-term value investment management firm, published its “Oakmark Global Select Fund” fourth quarter 2020 investor letter – a copy of which can be seen here. A return of 24.4% was recorded by the fund in the fourth quarter of 2020, outperforming its MSCI World benchmark that delivered a 14.0% return in the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Oakmark Global Select Fund, in their Q4 2020 investor letter, mentioned Lloyds Banking Group plc (NYSE: LYG) and emphasized their views on the company. Lloyds Banking Group plc is a London, United Kingdom-based financial services company that currently has a $41.2 billion market capitalization. Since the beginning of the year, LYG delivered a 17.35% return, extending its 12-month gains to 41.98%. As of March 26, 2021, the stock closed at $2.30 per share.

Here is what Oakmark Global Select Fund has to say about Lloyds Banking Group plc in their Q4 2020 investor letter:

“U.K.-based retail bank Lloyds Banking Group was a large contributor for the fourth quarter, which marked a sharp reversal of the stock price decline realized in the third quarter. Positive Brexit deal developments helped boost the share prices of European-based companies, including Lloyds, in the fourth quarter and culminated in a late-period trade agreement between the U.K. and European Union that formalized a new economic and security partnership. Lloyds also released third-quarter earnings that we found to be reasonable considering present macroeconomic conditions. For the full fiscal nine-month period, total revenue fell 17% and underlying operating profit declined 85% from a year earlier. Results were significantly impacted by impairment charges that rose dramatically (+334%) for the full period. However, the vast majority of the impairment charge increase occurred in the first two quarters and eased in the third quarter, which helped drive strong sequential growth of underlying operating profit, totaling GBP 1.2 billion. Other important metrics showed evidence of improvement as well, including retail deposits that rose 7%, which resulted in a loan to deposit ratio of 98%, reflecting a healthy liquidity position. Importantly, Lloyds’ balance sheet remains strong as its Tier-1 ratio reached 15.2% in the third quarter (up from 14.6% in the second quarter), which exceeded both management’s target of 12.5% and regulatory requirements of roughly 11%. Management cited additional encouraging signs of a business recovery, including increased mortgage activity, which we think positions the company advantageously as the general economy normalizes. As we have expressed previously, we contend that Lloyds possesses a wide range of strengths to draw upon to reinforce its business during current near-term challenges. Even including its strong fourth-quarter stock price performance, we still believe the company’s shares are undervalued compared with our estimate of intrinsic value.”

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Our calculations show that Lloyds Banking Group plc (NYSE: LYG) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Lloyds Banking Group plc was in 5 hedge fund portfolios. LYG delivered a 12.75% return in the past 3 months.