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Why You Might Think Of Investing In This FTSE Underdog: Barclays PLC

Contrarian investors like to find stocks that are out of favour with the market. When sentiment is negative then the true value of a stock can easily be overlooked. I’m trawling the underdogs of the FTSE to identify which of them may not deserve their sub-market PE ratings.

Barclays (LSE: BARC) (NYSE: BCS.US) has been the worst-performing bank in the FTSE 100 this year, losing 2.5%. Barclays’s prospective PE of 9.0 is also shy of the other banks, which fall in the range of 10.5 to 14.0. It’s similarly at a discount on a price-to-book value basis.

Rights issue

Barclays’ £6bn rights issue didn’t help, though it was rated poorly compared to its peers even before that. One of the last acts of the ‘Capital Taliban’ under former BoE Governor Mervyn King was to accelerate implementation of a strict leverage ratio which hit Barclays particularly hard. There should be few doubts over Barclays’ capital adequacy now.

Barclays is in the midst of a turnaround plan orchestrated by a new CEO – but so are Lloyds and RBS. It’s mired in regulatory breaches and fines – but so are other banks.

Investment banking

Barclays’ business is more skewed to investment banking than any of its peers. That hasn’t helped recent results – ironically, the relative calm of financial markets has hit profits in the fixed interest, commodities and currency trading business. But the recent stream of IPOs and the resurgence of M&A are pointers to growth in other areas. Barclays’ acquisition of the good parts of Lehman Brothers’ US operations has placed it in the top-notch of global investment banks.

It seems Barclays’ under-rating stems from the pounding its reputation took – beginning with being the first to own up to manipulating LIBOR – and the still-relatively early stages of its turnaround, which was slowed by the rights issue. The surge of undeployed fresh capital has pushed CEO Antony Jenkins’ modest RoE targets back a year.

Upside

But that gives Barclays a double-barrelled upside. Like all banks, its fortunes are geared to the strength of the economy, which is looking brighter. The turnaround plan, with cost cutting and more focussed investment on profitable growth, should amplify that.

And Barclays has some other gems, including its leading Barclaycard business and a strong position in Africa.

Risk

Bank shares could see steady growth over the next few years, but they're not without risk.

So the Motley Fool's pick for its top growth stock is in an entirely different sector. Though it has also seen disruption to its industry, the company has survived and prospered, consistently generating cash and increasing its dividend every year since 1988. To learn more about that company, you can download a free in-depth report by clicking here -- it's free.

> Tony owns shares in Barclays but no other shares mentioned in this article.