The recent news about Barclays (LSE: BARC) (NYSE: BCS.US) has been awful. Profits are falling. The investment bank is underperforming. Bankers’ bonuses are increasing. Thousands of jobs are being cut. Bank branches are being closed. And the Libor scandal rumbles on.
Quite simply, the mood music is terrible. And Barclay’s share price is falling again. Suddenly, investors are starting to wonder when the banks will ever recover.
Terrible mood music, but strong fundamentals
Surely this means that the company’s shares will keep falling? And that this is the time to bale out of Barclays shares?
Well, quite the contrary: for me, this is the time to buy Barclays shares, and definitely not to sell.
As 18th century nobleman Baron Rothschild once said, “The time to buy is when there’s blood on the streets”. This is the essence of contrarian investing. When everyone is walking away from a share, you walk towards it. When everyone disagrees with you, rather counter-intuitively, you are probably right.
Let’s dig a little a deeper. In 2013 Barclays made an underlying profit of £5.2 billion. It is on a 2014 price/earnings ratio of 10, falling to 8 the following year. The dividend yield is 3.7%.
Profits were lower than expected, largely because of the disappointing results of the investment bank. Barclays has an extensive investment banking business; however, this has suffered recently because it has a particular strength in bonds, and bonds prices are now falling.
A period of unprecedented change
Barclays, like the whole of the banking industry, is undergoing a period of unprecedented change. It is adapting to a world where more and more people bank via the internet. It has trimmed costs to accommodate a world of low interest rates. And the investment bank needs to adapt to a transition from a bond boom to an equity boom. And the whole banking industry has been under the spotlight like never before. But it could just turn all this negativity into a catalyst for change.
None of these tasks is easy, but Barclays is on the pathway to increasing profits. Its dividend is steadily rising, and a recovering economy and improving equity markets will boost the company’s profits. Overall, this is really a blue-chip growth company with a P/E ratio of 10 in 2014, falling to 8 in 2015. This is cheap, and is the main reason why I think that Barclays is still a buy.
