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Why I’m Bullish On Barclays PLC, But Bearish On ASOS plc

Both Barclays (LSE: BARC) (NYSE: BCS.US) and ASOS (LSE:ASC) are set to benefit from an improving UK economy. That’s because they both have considerable exposure to the UK and, to all intents and purposes, it remains their home market. Certainly, Barclays has considerable international operations and ASOS is continuing to expand abroad, however when it comes to their financial performance, the UK really matters to them. As such, the improving performance of the UK economy bodes well for both of their futures.

Investor Sentiment

While 2015 has been a decent year for investors in Barclays, it has been a much better year for ASOS. In fact, ASOS has posted a 49% rise in its share price since the turn of the year, while Barclays is up a still impressive 9% when you consider that the FTSE 100 has gained just 3% in the same time period.

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However, looking ahead, Barclays appears to have much greater potential for capital gains that ASOS. For starters, its shares are much, much better value than those of its UK-focused rival and, looking ahead to the next two years, its earnings growth numbers far exceed the rather modest outlook for ASOS.

For example, Barclays currently trades on a price to earnings (P/E) ratio of just 11.3, while ASOS has a P/E ratio of 90.9. If the latter had significantly better growth prospects than the former, it would perhaps be understandable that it trades on such a high rating. However, ASOS is expected to see its bottom line fall by 5% this year, before rising by 26% next year. This equates to annualised growth of 9.4% during the next two years, which is only slightly higher than the expected growth rate of the wider index, which has a P/E ratio of around 16.

Barclays, meanwhile, is expected to increase its earnings at an annualised rate of 28.3% during the next two years. That’s clearly a much higher growth rate than either the wider index or ASOS, and equates to a price to earnings growth (PEG) ratio of 0.4 versus 2.7 for ASOS. Clearly, Barclays offers more growth at a lower price.

Looking Ahead

Of course, a key reason for Barclays’ relatively low valuation is weak investor sentiment. Unlike ASOS, the market seems to be looking ahead to more fines, more allegations of wrongdoing, and further challenges for the global economy. Whereas with ASOS, investors are excited about its rising market share in key growth markets and its improving sales numbers.

Looking ahead, though, this could be set to change. For example, the current regulatory actions in the banking sector are unlikely to continue indefinitely and, over the medium to long term, they are likely to subside and allow investors to focus on Barclays’ low valuation and tremendous growth potential, thereby boosting its share price. And, while ASOS may be improving sales right now, its heavy discounting will need to end over the medium term so as to boost its bottom line figures. The outcome of this move is a known unknown and could cause weakness in the company’s top line.

So, while Barclays has lagged ASOS thus far in 2015, for long term investors it remains a better place to invest than ASOS, with an improving UK economy having the potential to catalyse its future share price performance.

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Peter Stephens owns shares of Barclays. The Motley Fool UK has recommended Barclays. The Motley Fool UK owns shares of ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.