The FTSE 100 has been on a charge so far this year. It’s up 7% in 2024 and traded to fresh all-time highs of 8,474 points last month. Some might think that it makes sense to just buy an index tracker. Even though this isn’t a terrible idea, some individual stocks are doing even better. Here’s one that I’ve noted.
Run the numbers
To keep things fair, I’m going to use the FTSE 100 performance over the past year. Over this time frame, it’s up 11%. The stock I’m comparing it to is Barclays (LSE:BARC). The banking giant is up 40% over the same period, smashing the index performance out of the park.
It hasn’t been plain sailing. As we entered the year, the Barclays share price was in the doldrums. Even though the interest rate hikes over the past couple of years helped to boost profits, investors stayed away. This pushed the price-to-earnings (P/E) ratio down to a very low level.
When I first spotted this back in February, the P/E ratio was around six. I use 10 as a benchmark figure for fair value. So naturally I thought this could be a smart value buy. After more research I decided to buy the stock.
Why it has outperformed
The share price started to rally in line with the broader FTSE 100 index, but at a much faster pace. I think this was partly due to the fact that the stock was undervalued, so had more catching up to do. Further, I think investors felt a lot more confident about getting involved after the CEO announced plans in February for a “simpler, better, more balanced bank”.
This involves billions of pounds worth of cost cuts, ranging from job cuts to infrastructure savings. The transformation plan was taken well by the market. Since then, the stock has been on a one-way ticket higher.
The Q1 pre-tax profits came in slightly ahead of expectations at £2.2bn, further supporting the stock. It also recorded lower loan default impairments. This is positive because some were concerned about the financial health of the consumer, particularly in the UK. Yet the fall in defaults shows that (for now) this isn’t a problem.
Looking forward
I expect Barclays shares to continue to outperform the FTSE 100 this year. The bank is well placed to push forward with the strategy shift. It should also benefit from the delayed start to interest rate cuts from the Bank of England.
Further, unlike some other sectors in the market, I don’t see the general election as being a big deal for Barclays. The operations should remain unhindered by whichever party gets into power.
As a risk, I wouldn’t say the UK economy is out of the woods yet. Any dip back into a recession later this year could see the bank take a hit. This would be from higher loan defaults, lower card spending, and other areas.
I’m happy to own the stock and think investors should consider doing the same.
