With inflation floating around levels not seen for decades, naturally I’m on the hunt for quality value stocks that can generate some healthy returns in the long run.
There’s a variety of stocks that fit this bill across a host of sectors. And given current market conditions, I think there are plenty of opportunities presenting themselves.
But right now, my choice is Barclays (LSE: BARC).
A rough patch for banking
It’s safe to say this year hasn’t seen a top performance for the financial sector and banking stocks.
Inflation has weighed down on market confidence, while aggressive rate hiking cycles and events such as the collapse of Silicon Valley Bank and its implications have investors spooked.
With all the above combining, now may be deemed a bad time for investors to dip their toes into the market and, more specifically, banking stocks. But I’m taking a contrarian view.
Barclays’ positives
There are plenty of reasons I’m keen on Barclays. Let’s start with its valuation. As I write, the stock trades on a price-to-earnings ratio of just 4. This seems seriously undervalued. And compared to the FTSE 100 average, which is around three times the figure, this is reinforced.
To add to this, its price-to-book ratio, which measures how the market values a company compared to the value of its assets, is around 0.4. This again signifies the stock is massively discounted.
Moreover, Barclays stock offers a sizeable dividend yield that could tie me over for the time being, should the financial sector continue to experience volatility. Rewarding investors with a yield of around 5.3%, I could put my money to work to fight back against red-hot inflation rates.
Its recent half-year results saw the interim dividend hiked 20%. The firm further announced a new share buyback scheme totalling £750m, a 50% rise from the same period the year prior.
Of course, there’s always the risk that dividends may be cut at any moment. And judging by the current volatility, this is clearly a threat. However, with its dividend well covered by earnings, I’m confident of a payout.
Global presence
Granted, Barclays isn’t the only banking stock I have my eye on at the moment. But there are a few other characteristics that make it stand out.
For example, I like its diversification and its global presence, with operations in over 40 countries. And it has expertise in areas from retail to investment banking. This arguably gives it an edge over some of its competitors.
The risks
While its global diversification is a bonus, it does have some drawbacks. Namely, this relates to Barclays’ US operations and the volatility we’ve seen across the pond with its investment arm.
On top of this, we’ve already seen the impact defaults have had on banks. And with rates expected to continue rising this year and potentially beyond, further damage could be seen.
My move
The short-term outlook for Barclays is a rather bleak one. But as legendary investor Warren Buffett once said: “Be greedy when others are fearful.”
On top of its low valuation and sizeable yield, I think Barclays is well-positioned to succeed in the long run. If I had the cash, I’d snap up some shares.
