Last week’s half-year results report from Barclays (LSE: BARC) revealed some poor numbers. And, looking ahead, the directors aren’t expecting much improvement during the second half of the year. In fairness, the market appears to be up with events because the Barclays share price has already plunged by about 45% this year.
Will an earnings rebound boost the Barclays share price?
However, City analysts following the firm expect full-year earnings to come in more than 80% down on 2019’s figures. The directors expect the uncertain economic outlook and the low interest rate environment to combine to make trading in the second half “challenging”.
In fairness, banks are ‘supposed’ to see the collapse of their earnings, dividends, and share prices when the economy goes into recession. If you invest in out-and-out cyclical shares, you’re ‘signing up’ for the volatility that comes with the stocks. And banks are perhaps the most cyclical outfits that exist.
Banks facilitate the finances of other businesses and individuals. Therefore, if things are tough for the banks’ customers, things are tough for the banks. Right now, Barclays is seeing higher levels of bad debts, for example.
I’ve long ago abandoned any notion of trying to invest in Barclays or any other bank for the long term. What’s the point? The stocks will lead the market into and out of every recession and downturn. Profits will swing up and down and, over the long haul, my investment could end up going nowhere. That’s essentially what has happened since the last crash around 11 years ago with Barclays. Why shouldn’t it happen after this one?
It’s cheap, but is it risky?
But the stock does look cheap. With the share price near 103p, the net tangible asset value is running close to 0.3. And City analysts have pencilled in a triple-digit percentage rebound in earnings for 2021. It’s easy to make a case for Barclays being too cheap to ignore.
If I were to invest in the share now it would only be a relatively short-term trade aiming to catch the next up-leg. Back in 2009, for example, Barclay’s shot up by about 260% from its crash lows over a period of just seven months. Yet after that dramatic rise, the share has never been as high again since, which adds more weight against the idea of choosing the stock for a long ‘hold’.
I know there have been a few dividends along the way for shareholders, but capital losses can wipe out years’ worth of income gains when a stock crashes. And although the valuation indicators show the share looks cheap now, it is still risky. Barclays is so beholden to the outcomes in the real economy that it could easily plunge 50% again from where it is now before it starts to recover.
On balance, I’d rather invest in one of the many other decent companies listed on the stock market. So Barclays isn’t too cheap for me to ignore.
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Kevin Godbold has no position in any share 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.