Why so cheap today?
The financial crisis frightened many investors off bank investment for life. These scaredy-cats have missed some big gains. However, I think that shares in Barclays (LSE: BARC) (NYSE: BCS.US) still retain huge profit potential.
Next week’s interim results should provide an indication of just how profitable the company will be this year. If Barclays can show that it is on track, this would help underpin the share price and point the way to further rises.
Share price movement
There is evidence that this is already happening. In the last month, shares in Barclays are up 15%. In that time, the FTSE 100 has managed to increase ‘just’ 10%. At today’s price, Barclays shares trade just 5% off a three-year high.
Commentators agree that the US economy is enjoying a broad recovery. The UK economy is also strengthening, with growth forecasts being revised upward. A recent market survey has raised expectations that the eurozone may soon exit recession.
In the US, the Dow Jones Industrial Average is up 23% this year and today stands at an all-time high. The FTSE 100 is up 17% in the last year and recently traded around a 10-year high.
Strong markets and growing economies are a great cocktail for a bank with a business mix like Barclays’.
According to the consensus of analyst profit forecasts, Barclays should make earnings per share (EPS) of 36.4p in 2013. This is then expected to rise 19%, reaching 43.1p next year. These estimates put Barclays shares at a 67% valuation discount to Lloyds and a 57% discount to the rest of the FTSE 100.
According to the last published balance sheet, Barclays has a net asset value of 405p. Despite being profit-making, Barclays is trading at a 27% discount to this figure.
In the absence of external shocks, I expect that month-by-month, more and more investors will be inspired by the Barclays bull case. This should deliver a significant re-rating of the shares.
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> David owns shares in Barclays but none of the other companies mentioned.