Is the Barclays share price an unmissable bargain or a value trap?

If you are tempted by the valuation indicators with Barclays plc (LON: BARC), read this.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’ll see a lot of articles extolling the virtues of Barclays  (LSE: BARC), and the argument tends to go something like ‘Barclays is turning itself around, yet the shares look cheap, so I’d buy the shares.’

However, it has looked cheap for a long time, but the truth is that the shares are more than 50% lower than they were nine years ago. Indeed, September 2009 marked the top of Barclays’ bounce-back from the stock’s dip following the credit crunch last decade.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

For most of that period, people have been saying Barclays is recovering and it’s selling cheap. But if you’d bought the shares in September 2009 you’d have collected 46p in dividends and lost around 170p per share on the share price, for an overall loss close to 37%. At first glance, Barclays looks like it has been a value trap over the past nine years, but that’s only true if you believe it has been displaying indicators that suggest good value. I don’t.

What is good value?

With many trading companies, a low price-to-earnings (P/E) ratio, rising earnings, a high yield and a discount to net asset value would flag good value. But I think it’s different for the banks because they operate very cyclical businesses. That’s easy for me to say with the benefit of hindsight, but it first dawned on me during 2013 when I turned cautious on Barclays.

I think we need to read the valuation indicators backwards for the banks. High earnings and a low valuation could spell danger for shareholders because it could mean we are getting closer to a cyclical peak in earnings. Then, if earnings fall and the valuation looks higher, the indicators could be flagging better value.

Within the broad downtrend in the Barclays share price since 2009, we can see the phenomenon playing out. Earnings dipped in 2012 and the P/E rating shot up. The shares were down, but it was time to buy despite the higher P/E multiple because earnings recovered, the P/E declined again, and the share price rose around 95% over seven months. A similar thing happened in 2016 too.

Looking forward, City analysts continue to forecast advances in normalised earnings and the dividend is moving up too. Yesterday the firm confirmed its intention to pay a 2018 dividend of 6.5p, subject to regulatory approvals, which takes the payout back to where it was in 2015. But the stock market appears to be in no mood to raise its valuation of Barclays. The opposite is true, and the valuation continues to fall. Indeed, the recovery in the share price in 2016 failed to reach the recovery peak of 2013 and the downtrend looks intact.

I think the stock market sees ever greater danger in the recovery at Barclays because each advance takes the firm closer to its cyclical peak in earnings. So, the market keeps marking the valuation down. With Barclays today, I see a capped upside for shareholders with lots of downside, cyclical risk, so I think it is more of a value trap than an unmissable bargain.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

More on Investing Articles

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

I bought these 4 cheap shares for a market recovery

After months of sitting on my hands, I've finally taken the plunge by buying four cheap shares. Of course, their…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

Here’s why I’m buying more shares in one of my best stocks to buy!

This Fool explains why he is planning on adding further shares of one of his holdings to boost his portfolio.

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

Just 6% of investment trusts make positive return in H1! What should I do?

The returns from investment trusts have so far disappointed this year. Here's why I plan to continue splashing the cash…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

Could this FTSE 100 stock be a bargain to buy and hold?

This Fool believes there are some excellent bargains to be had on the FTSE 100 and details one he is…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Are these the best income shares to buy in 2022?

Andrew Woods wonders if he should add these two companies to his portfolio to create a consistent income stream.

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

At 41p, are Lloyds shares now too cheap to miss?

As interest rates rise, Andrew Woods asks if now is the time to load up on Lloyds shares.

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

2 dirt-cheap UK shares to buy right now!

Stock market volatility remains very high. This presents excellent opportunities for investors to buy mega-cheap UK shares like these two…

Read more »

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Investing Articles

Should I buy soaring Abrdn stock? Or am I too late?

Abrdn stock jumped 8% in Wednesday morning trading. The share price has tanked this year, so maybe its fortunes are…

Read more »