Barclays' shares have soared since their recent bottom and Bruce Jackson took the opportunity to sell out.
I recently sold my entire holding in banking group Barclays (LSE: BARC). I originally bought my stake in the company back in the months leading up to the last stock market bottom, way back in March 2003.
I purchased the majority of my holding at prices of 374p and 335p. Almost five years later, I then bought more Barclays in February 2008, paying 461p. I sold the entire holding a couple of weeks ago at around 300p.
My Biggest Mistake
Before I go into my reasons for selling, my biggest mistake was in not buying even more Barclays earlier this year. The share price plunged all the way down to as low as 51p. Instead of wading in then, at the time of maximum pessimism, I sat there like a stunned mullet, watching and waiting, but ultimately doing nothing.
I suspect I wasn't alone. In hindsight, it was an obvious trade. But at the time, the entire British banking system was at serious risk of nationalisation.
HBOS, Bradford & Bingley and Northern Rock had all disappeared off the face of the earth. The government ended up with majority stakes in Royal Bank of Scotland (LSE: RBS) and Lloyds Banking Group (LSE: LLOY). Barclays could easily have been next.
Freefall
The other problem was, at the time, banking shares were in freefall. This article, titled Time To Take A Punt On A Bank, told the story of how one highly respected Motley Fool discussion board poster bought RBS at what he thought was the ridiculously cheap price of 24p, only to come home from work and find the shares trading at 11.5p.
To those people who were brave enough to buy banks around that time, and to hang onto them all the way through to around now, I tip my Foolish cap. If you were one of those people, please post your happy tale in the comments boxes below.
That was then and this is now. My no-money hindsight portfolio continues to fly higher, but unfortunately it doesn't help me retire a rich man.
The 5 Reasons I've Sold
So why sell Barclays now?
1. Valuation. If you can believe analyst estimates, Barclays trades on a forward P/E of 14 and a forward dividend yield of 2%. In 2005, 2006 and 2007, its average P/E was 11. Barclays is not cheap. In fact, you could argue it's expensive. Certainly, at around 300p, I believe the downside risks are greater than the upside potential.
2. Difficult accounts. Have you ever tried fully deciphering a bank's accounts? Typically then run into 60 odd pages, full of talk about equity tier 1 ratios, Mandatorily Convertible Notes, risk weighted assets, adjusted gross leverage, loss impairments, etc, etc. For a relative layman like myself, it's impossible to know and understand what these terms mean and how they might affect the bank's profitability. Life is too short.
3. Predictability. In the midst of this global recession, how on earth can anyone predict the level of profits or losses a bank like Barclays might make next year, the year after, or even five years from now? Did Barclays make dodgy loans to people who can't afford to pay them back? How many of them did they make? In which countries? Are they exposed to Alt-A mortgages? What effect will the sale of Barclays Global Investors have on future profitability? It's all a guess.
4. The economy. It's no secret I think we're set for a period of slow economic growth. The recovery will be L shaped rather than V or even W shaped. The Great Recession can't just end early next year and we all get back to how it was in 2007. It doesn't mean I'm not a buyer of shares in the months and years ahead, it's just that I'm more conscious than ever about valuations.
5. Better opportunities elsewhere. As per the first point on valuation, I believe Barclays is fully valued. There are many other companies, particularly large companies, that are cheaper on a P/E basis and have attractive dividend yields. I'd prefer to invest my money in what I think are lower risk companies.
For All You Barclays Bulls Out There…
Of course, I'm sure some people can make compelling cases as to why Barclays shares are a buy or at least a hold today.
- They have less competition today than they had last year. With the sale of BGI, they will have a very strong balance sheet, enabling them to produce huge profits once the economy recovers.
- The valuation is based off depressed earnings. If they were to recover to the level of profitability they enjoyed in 2007, they'd be trading on a P/E of 4.6.
- On a 5- or 10-year perspective, Barclays shares will be fine. The economy will have recovered and the shares will be powering ahead. The shares peaked at 790p in 2007 and are likely to regain that level again in the future.
People have different opinions. That's what makes a market, and continually helps make stock market investing challenging, fascinating and hopefully ultimately rewarding. I've stated my reasons for selling. Time will tell whether I'm right or wrong.
As ever, please let us have your comments in the boxes below.
More on the economy and the markets:
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> Of the companies mentioned in this article, Bruce Jackson still has a very small interest in Lloyds Banking Group.
