There's stunning news to end the week in the investing world. Fund manager and long-time uber-bear on banks Neil Woodford has just revealed he's bought a significant stake in Lloyds(LSE: LLOY)for his flagship equity income fund.
Perhaps just as surprising for Woodford-watchers, he's also announced that he's completely disposed of his holding in old favourite GlaxoSmithKline(LSE: GSK).
Woodford's update shows Lloyds as representing 2.05% of his equity income fund (as of 30 April), ranking it as the 11th-largest holding in his 131-strong portfolio. The purchase is his most notable in what is a veritable sea of trades over recent weeks. What's behind them?
In short, his communications chief explains: "Neil has been keen to take advantage of what he sees as a compelling, contrarian opportunity in domestic stocks, which have become too cheap to ignore in the wake of the Brexit vote last year".
Black Horse set to gallop
Woodford reckons investors have become "far too pessimistic about the UK economy", particularly about inflation and the business and consumer confidence environment leading up to the Brexit impact date in 2019.
He points to record levels of employment and job vacancies but also, crucially, says "the one other very big significant factor which I've been waiting for for some time is that the credit environment has begun to normalise in the UK". He believes banks are now "broadly repaired" and that lending dynamics are providing a positive for the economy for "the first time really since the financial crisis".
As such, he's turned bullish on the outlook for domestic banking. Specifically, he and his team "view Lloyds as a well-managed bank with a conservative approach to its balance sheet. Its valuation looks very attractive in our view, and it has the ability to pay a very healthy and growing level of dividend".
Lloyds' attractive valuation is something many of us here at the Fool have been highlighting. The forward price-to-earnings ratio is a bargain basement 9.5, while the consensus forecast dividend gives a glorious yield of 5.4%, rising to 6.2% next year. Like Woodford, I believe the shares are very buyable at their current level of less than 70p.
Woodford's optimism on the UK economy hasn't just led him to buy Lloyds. He's pumped cash into a fair number of carefully selected "domestic cyclicals". His update lists brick-maker Forterra and student accommodation specialist Watkin Jones, as well as more familiar names, including Barratt Developments, Taylor Wimpey, British Land, Topps Tiles and Card Factory.
End of an era
The complete disposal of FTSE 100 pharma giant GlaxoSmithKline (after holding it for 15 years) is the most notable trade Woodford's made to fund his new stock purchases. He hasn't soured on the sector generally -- AstraZeneca remains his biggest holding -- but he's tired of what he sees as Glaxo's "sub-optimal business strategy".
He's long called for a break-up of the group to unlock shareholder value, but with new chief executive Emma Walmsley having got the gig as a 'continuity candidate', he reckons "the prospect of a Glaxo break-up now looks more remote than ever".
His base assumption is that under a continuing sub-optimal conglomerate structure, "shareholders face a cut to the dividend". I'm not altogether convinced by Woodford's argument but it's certainly something for shareholders or prospective investors to consider.
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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.