2024 has been a year of ups and downs for UK large-cap investors with the FTSE 100 gaining 7.8% at the time of writing. It hasn’t all been smooth sailing with middling performance since June this year.
While I’ve got my eye on several stocks, there’s one market darling that I’ll be avoiding next year.
Surging share price
The stock in question is Barclays (LSE: BARC). Shares in the high street bank have been soaring in 2024 including a 29.4% gain in the last six months and 90.6% in the last year to £2.70.
In February, the company announced £2bn in cost-cutting measures, principally across its investment bank and UK retail bank. It’s part of a broader three-year reorganisation plan as it looks to shed 5,000 jobs and simplify the business.
Shareholders have also been impressed by Barclays’s ambition to return £10bn over the next two years through dividends and buybacks.
Combined with strong Q3 results ahead of expectations, including a 23% boost in third quarter profit to £1.17bn, it’s easy to see why investors are upbeat.
Why I’m wary
The turnaround plan is under way and there are signs of early success. However, I am wary of being too bullish on the stock.
For one thing, I see the potential for profitability pressures in 2025. Interest rates are widely tipped to fall, and this could put pressure on the margins lenders can charge in the ultra-competitive deposits market.
As a major source of funding, which drives cost of capital and therefore profitability, this is something I’m mindful of right now.
There are also the fundamental changes to the group’s operations. A shrinking of its investment banking unit has been well-telegraphed, but third-quarter income in its investment bank still grew 6% and also beat expectations.
While I understand that volatility in this division can be a challenge, it can also provide upside to the bank in the good years.
Valuation
Another reason I’m steering clear of Barclays in 2025 is valuation. Shares in the business have been ripping higher and that’s great for investors who are along for the ride.
However, the stock has a dividend yield of 3.1% right now and is trading at a price-to-earnings (P/E) ratio of 9.6. The key for me is how that compares to its UK banking peers.
All three of HSBC, Lloyds and NatWest are trading at around 8 times earnings right now. That alone tells me that Barclays is a little overvalued.
It’s a similar story on the yield front. Lloyds and HSBC have significantly higher yields of 6.2% and 5.3%, respectively, while NatWest boasts 4.3% for good measure.
Verdict
I don’t see anything compelling to suggest Barclays is a better buy than the other banks right now. The company has announced some shareholder-friendly initiatives and is on a drive to boost profitability and return capital.
However, I am a Foolish investor so I like to take a long-term view. With higher yields and a stable operating model, I have HSBC as my front-runner within the industry at present.
Given the potential rate cuts, I don’t think I’ll be adding to my financial services exposure for the time being. I’ll be looking in more defensive, non-cyclical sectors like pharmaceuticals for my next purchase.
