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Should you buy Barclays plc after shares jump 25% in one month?

Image: Barclays. Fair use.

After plummeting in the aftermath of Brexit, shares of Barclays (LSE: BARC) have made up lost ground and then some after a 25% rally in share prices over the past month alone. Does this mean Barclays’ long turnaround is finally bearing fruit and investors should buy the shares?

Well, the good news is that there’s certainly good progress being made in reducing the non-core bad assets that have crimped profits ever since the Financial Crisis. Q3 results listed the sale of a further £1.1bn of unwanted businesses to bring total non-core assets down to £44bn. The bad news is that this is still a remarkably large pile of bad assets that posted £1.4bn in losses in the nine months through September alone.

That said, the bank’s target of reducing non-core assets to £23bn by the end of 2017 is still in place. Achieving this target would be a major step forward as it would allow the bank’s very profitable UK retail banking and transatlantic credit card arms to shine.

Why it’s rising

But, the news of relatively small asset sales isn’t enough to drive share prices up over 20%, so what is it? A large part of the rally is due to political events that have driven up shares of all the big domestic retail banks. For one, Brexit fears are subsiding as encouraging economic data and levelheaded comments from the government reassure investors that the economy isn’t about to plummet off a cliff.

Second, Donald Trump’s victory has bankers giddy at the prospect of rolling back post-Crisis regulations that crimped banks’ riskier, but highly profitable, operations. This is particularly good news for Barclays, which bought the remnants of Lehman Brothers’ US investment bank in 2008. Like all European investment banks, Barclays’ has suffered as higher capital buffer requirements, increased compliance costs and a pullback from certain markets have kept profits at a fraction of their pre-Crisis level.

Now, it’s still unknown whether Trump can actually repeal post-Crisis financial reforms that likely benefitted the very people who elected him. And the threat from Brexit is still very real, especially for banks as reliant on the health of the domestic economy as Barclays.

But if investors ignore these macroeconomic shifts outside of management’s control, is now an opportune moment to buy Barclays shares? I still don’t believe so. Besides the billions in bad assets stunting the bank’s profitability, a massive investment bank that’s still struggling to match pre-Crisis returns and legacy regulatory issues a persistent threat, it’s simply because there are better options out there.

The appeal of Barclays is its stellar retail bank. Which is great, but if investors want a profitable but boring bread and butter deposit and loan bank, newcomers such as Virgin Money or CYBG offer the same qualities without the need to worry about misconduct fines, high operating costs or  those bad assets. While shares of Barclays may offer more upside growth potential, it shouldn’t be forgotten that investors have been promised for years now that a turnaround is just around the corner and the shares are still trading well below even their 2009 prices, much less pre-Crisis levels. 

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.