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Why I’d sell Barclays plc to buy this growth star

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I reckon fast-growing mortgage and financial advice company Mortgage Advice Bureau (Holdings) (LSE: MAB1) is an attractive potential investment in the financial sector and a viable alternative to buying shares in one of the big London-listed banks such as Barclays (LSE: BARC).

One of the things I like most about MAB1 is the debt-free balance sheet. In 2017, the unrestricted cash balance went up just over 22% to £13.2m. The firm’s strong financial base is a good platform to build further growth upon.

Expansion on track

Today’s full-year results demonstrate that expansion is on track. Revenue and adjusted earnings per share both increased by 17% during 2017 compared to the year before, and the directors expressed their confidence in the outlook by pushing up the total dividend for the year by 17% too.

Gross mortgage completions came in 18.5% higher at £11.9bn and the firm said its market share increased 13% to 4.6%, suggesting it is becoming a strong force in Britain’s mortgage advice market. Since the end of the year, the company’s adviser-count has grown to 1,096 and the directors expect to grow numbers further during 2018.

In 2017, the enterprise earned 43% of its revenue from mortgage procurement fees, but that’s not the only string to the company’s bow. Some 39% came from protection and general insurance commission, 16% from client fees and 2% from other sources.

Although MAB1 operates in a cyclical sector – as do all financial companies including the big banks – the immediate outlook is positive. City analysts following the firm expect earnings to grow around 12% this year and 16% during 2019, which is a robust rate of growth. Meanwhile, today’s share price around 586p puts the firm on a forward price-to-earnings (P/E) ratio of 19 for 2019 and the forward dividend yield runs close to 4.8%, which looks like a full valuation, but fair considering the growth on offer.

Bigger does not necessarily mean safer

MAB1’s market capitalisation sits close to £298m making it a minnow compared to Barclays’ gargantuan £37bn. I can understand why investors are drawn to big, well-known names on the stock market, but I’m not convinced that Barclays will make a safer investment than MAB1. Both firms operate in cyclical markets and the downside can be brutal if you catch a cyclical downturn, however big the market capitalisation.

Yet Barclays’ valuation looks attractive at first glance. Today’s share price around 217p throws up a forward P/E rating of just over nine for 2019 and the forward dividend yield runs a little higher than 3.6%. Forward estimates suggest earnings will rise around 15% during 2019. But Barclays’ earnings have been patchy over recent years, falling more often than rising year to year.

I don’t trust the market to ‘allow’ Barclays’ stock to advance very far. I think the valuation will remain subdued, and could even contract as earnings rise, because the market will be trying to anticipate the next plunge in earnings that often comes around in a cyclical operation. Meanwhile, the operational momentum at MAB1 reflects in good share-price momentum, which looks set to continue. That’s why I’d sell Barclays shares to buy shares in Mortgage Advice Bureau.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.