There are plenty of cheap stocks on offer for investors right now, following the market crash of the last couple of weeks. We’ve seen some unusually heavy falls, even among stocks in the blue-chip FTSE 100 index.
Both the market and Barclays (LSE: BARC) are enjoying a mini bounce today. Nevertheless, the bank’s shares – at around 121p – are 33% below their pre-crash level on 21 February. Furthermore, they’re down well over 50% from their post-financial-crisis high. This suggests a potential upside of over 100%, if they return to their former level. I think this is possible, and that buyers of the Barclays share price today could double their money.
Bargain basement
The most popular indicators of value used by investors – price-to-earnings (P/E) ratio and dividend yield – suggest Barclays is in the bargain basement.
The bank posted statutory earnings per share (EPS) of 14.3p for 2019, and underlying EPS of 24.4p. On the statutory number, the P/E at the current share price is 8.5. On the underlying number, it’s 5.0. Either way you look at it, Barclays is trading on a cheap-as-chips earnings multiple.
Meanwhile, the 9p annual dividend gives a running yield of 7.4%. This is comfortably above the FTSE 100 average of 5%, so also points to the Barclays share price being cheap.
Pay 46p for £1 of assets
My favourite ratio for valuing banks – price-to-tangible net asset value (P/TNAV) – similarly indicates the stock is currently hanging on the sale rail. TNAV per share at the year-end stood at 262p, so the P/TNAV ratio is 0.46. Put another way, investors are paying just 46p for every £1 of Barclays’ assets.
I think healthy banks merit a share price on a par with TNAV (i.e., a P/TNAV of 1). A 100% rise in Barclays’ share price would still leave the P/TNAV shy of that, at 0.92. This bolsters my view that Barclays represents a potential double-your-money opportunity.
Why so cheap?
Remarkably, Barclays isn’t a struggling company. All its operational metrics point to an improving and stronger business after a long period of post-financial-crisis restructuring. Its operating expenses and cost-to-income ratio are falling, its capital strength is above target, and its underlying return on tangible equity is heading towards double figures.
Why so cheap then? Well, the impact of Brexit has weighed on sentiment for the last few years. And now we have the risk of the spread of the coronavirus triggering a global recession.
Classic value investment
A recession is a credible risk, in my view. However, I think Barclays is so cheap, particularly on its P/TNAV ratio, that even if we do have an economic slump later this year or next, investors could still see a double-their-money return on a three-to-five-year view.
I also think there may be a possibility of booking a less extravagant, but much quicker, return. Donald Trump has made the stock market a key barometer of the success of his administration. I’m sure he’ll do, say, or tweet anything in his power to try and reinvigorate the markets ahead of the US presidential election later this year.
If world stock markets do happen to rally in the coming months, I think Barclays could deliver a very nice return in quick order. In short, I see a classic value investing buy-low-and-sell-high proposition, possibly within the year, but more realistically on a three-to-five year view.
