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Last year, he shared Lloyds Banking Group (LSE:LLOY) were trading at around 45p. Now, the stock is close to the 60p mark.
There is no question that Lloyds shares were better valued last year than they are today. But investors shouldn't be too quick to think they've missed the boat.
It is relatively expensive and very expensive
There's a difference between a stock being more expensive than it was and being expensive, a full stop. And arguably, the Lloyds share price is a good example of this.
Currently, the price-to-earnings (P/E) ratio of FTSE 100 is 15 years old. Despite an impressive performance over the past year, Lloyds shares trade at a significant discount this year, with a P/E ratio of just under 8.
Equivalently, the average FTSE 100 stock trades at a price-to-book (P/B) ratio of 1.8. Also, Lloyds is very cheap, with a P/B ratio of 0.77.
The share price may be 30% higher than this time last year, but it still looks cheap compared to the broader index. So the stock may have just gone from being overvalued a year ago to being overvalued today.
Bank shares
It is important to note that bank stocks generally trade at lower multiples than other businesses. That's because it can be harder to make money in the banking industry than in other areas.
First, profitability can be more cyclical – when interest rates are high, banks can often earn more on the loans they issue, increasing their income. But the opposite is true when interest rates fall.
For now, it looks like an interest rate cut is on the cards this year. That could cause the likes of Lloyds to register lower profits and leave it unable to maintain its dividend payments.
It's not all doom and gloom. The worst outcome for banks like Lloyds is that if borrowers default on their loan obligations and low interest rates can reduce the chances of this happening.
What makes Lloyds different?
It is also important to think about what separates Lloyds from the other banks in the FTSE 100. Both Barclays again NatWest trade at low P/E multiples and are to some extent sensitive to changes in interest rates.
One of the main advantages that Lloyds has is its deposit. It has the largest share of UK bank deposits and this helps protect it from significant banking risk.
Banks use deposits to finance their lending activity. But the customer can ask for his money at any time and the bank has no power to recall someone else's loan.
This is the risk of time. The most effective protection is a large base of deposits that may not be withdrawn at the same time – and this is what gives Lloyds its position as a leading retail bank.
Is it too late to buy?
Lloyds shares were cheaper than they are now. But they still trade at a low P/E ratio compared to the FTSE 100 average.
This means the stock can be a good value, even if low interest rates weigh on future gains. As a result, I don't think it would be crazy to buy Lloyds shares at today's prices.
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