We recently compiled a list of the 12 Cheapest Stocks with Biggest Upside Potential. In this article, we are going to take a look at where Lloyds Banking Group plc (NYSE:LYG) stands against other cheapest stocks with biggest upside potential.

Stocks rallied on January 15, following an encouraging consumer price index (CPI) report that indicated a slowdown in core inflation and strong earnings from major U.S. banks. The Bureau of Labor Statistics reported that core inflation, which excludes food and energy, rose 3.2% in December, down from the previous month and slightly below the 3.3% forecast by economists surveyed by Dow Jones. Headline inflation increased 2.9% over the past year, matching expectations.

In an interview on January 16, Tom Lee, Managing Partner at Fundstrat provided his outlook on the current market dynamics and stock performance expectations for the year. Lee noted that the market is showing relief following the better-than-expected December Consumer Price Index (CPI) report, which, along with the Producer Price Index (PPI), has been dovish. This has set the stage for bond yields, which had been approaching 5%, to cool down, particularly in a context where market sentiment has been largely negative. Lee emphasized that the recent dovish inflation prints, including the core CPI, have alleviated fears of a hot number, leading to a reduction in the probability of a rate hike, as reflected in the Fed funds futures.

Lee also discussed the implications of the California fires on future inflation, suggesting that these events could introduce additional volatility. However, he remains optimistic about the inflation outlook over the next three months, expecting it to be significantly lower compared to the levels seen in November and October. He pointed out that the inflation figures in January of last year were around 0.4%, indicating that the upcoming months could offer favorable comparisons, which is positive for the market.

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Regarding the potential for a good year in the stock market, especially after the S&P’s back-to-back 20%+ gains, Lee expressed a high level of optimism, estimating an 80% chance of achieving double-digit returns for the year. He highlighted the positive start to January, with the S&P main index already up 0.7% by January 15, as a good harbinger for the year ahead. However, Lee acknowledged that the market’s performance could be challenged if bond yields remain elevated, as this would represent a severe tightening of financial conditions, potentially impacting sectors such as housing.

When asked about the market’s resilience if the Federal Reserve does not cut rates until later in the year and bond yields remain high, Lee admitted that such a scenario would test the market’s resolve. While he doesn’t believe it would be fatal for equities, he noted that it would be difficult for investors to remain highly bullish if yields stay near 5% for the next six months. This could raise concerns about a policy error from the Fed, either due to financial conditions being too tight or the bears arguing that the Fed cut too aggressively in the past.

The stock market’s positive momentum, fueled by encouraging inflation data and strong earnings reports, suggests a promising outlook for the year ahead. Companies with strong fundamentals, growth prospects, and undervaluation are positioned for significant returns.

Our Methodology

To compile our list of the 12 cheapest stocks with biggest upside potential, we used Finviz and Yahoo stock screeners to find the 40 largest companies trading below the forward P/E ratio of 10 as of January 15. We then sourced the analysts’ average price targets and picked the 12 stocks that had the highest upside potential. We also included their stock price as of January 15 and their hedge fund sentiment, which was taken from Insider Monkey’s Hedge Fund database of 900 elite hedge funds as of Q3 of 2024. The list is sorted in ascending order of analysts’ average upside potential as of January 15.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Lloyds Banking Group plc (NYSE:LYG)

Upside Potential: 30.19%

Forward P/E Ratio as of January 15: 7.74

Stock Price as of January 15: $2.65

Number of Hedge Fund Investors: 10

Lloyds Banking Group plc (NYSE:LYG) is a major financial institution based in the United Kingdom. The group offers a wide range of banking and financial services to individuals, small businesses, and corporations through brands such as Lloyds Bank, Halifax, and Bank of Scotland.

Lloyds Banking Group plc (NYSE:LYG) is investing heavily in its strategic initiatives to drive long-term growth. The Group aims to deliver $1.83 billion in incremental revenues by 2026, with a significant portion of this growth coming from other operating income. The group is strategically investing in technology, product innovation, and customer experience enhancements. The Group has recently launched a “Your Credit Score” tool to help customers manage their financial health, which has been linked to increased take-up in personal loans and improved credit quality.

Lloyds Banking Group plc (NYSE:LYG) is committed to cost discipline and efficiency to enhance profitability. The Group aims to achieve a sub-50% cost-to-income ratio by 2026, which is a significant improvement from current levels. This will be achieved through a combination of cost savings, technology investments, and strategic restructuring. Lloyds Banking Group plc (NYSE:LYG) is also focused on reducing its cost base through efficiency gains, which are expected to become more pronounced in 2026 as the impact of depreciation and other cost-saving measures take effect.

Overall LYG ranks 11th on our list of cheapest stocks with biggest upside potential. While we acknowledge the potential of LYG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than LYG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.