As a dedicated seeker of cheap shares, I’m always on the lookout for sharp price movements that push company valuations into bargain territory. Given the extreme volatility of the UK stock market in 2020, this has often been a happy hunting ground.
In March, cheap shares were everywhere
At the start of 2020, the FTSE 100 was riding high, peaking at nearly 7,675 points on 17 January. Then came an almighty stock market crash that saw the index lose 2,680 points (35%) to close below 5,000 on 23 March. This left the UK’s main market index bursting with bargains, with cheap shares in many good businesses hitting multi-year lows. Shockingly, some stocks lost the majority of their value in just over two months. Wow.
The FTSE 100 bounces back, but bargains remain
Today, the FTSE 100 index hovers around 5,860 points, up more than a sixth (17.5%) from the dark days of March. Yet despite this bounce-back, there are plenty of shares in the Footsie’s bargain bin. By cheap shares, I mean companies with solid balance sheets, lowly rated earnings and, ideally, decent dividends (or the prospect of future cash payouts). Right now, I would estimate that perhaps a quarter to a third of all FTSE 100 shares have fallen into the bargain bin.
Barclays gets better in Q3
On Thursday 16 October, I wrote about the continued decline in the share price of Barclays (LSE: BARC). With the share price closing at 101.54p, I said that I would happily buy these cheap shares. After all, they had crashed to almost half of their 52-week high of 193p, hit on 16 December last year.
The good news for the bank’s stressed owners is that its share price has leapt upwards this week. As I write, Barclays shares trade at 111.58p, up almost 10p (9.9%) since my recent article. Most of this surge in value came today, thanks to the Big Four bank releasing an improved set of results.
Happily for holders of these cheap shares, Barclays’ financial position has improved dramatically from the second to third quarter. The group’s income of £16.8bn was up 3% year to date (YTD). Credit impairment charges (for loan losses) fell by almost two-thirds (63%) from Q2 to Q3. Group profit before tax was £2.4bn YTD. The bank’s Common Equity Tier One ratio — a measure of its financial strength — was 14.6%, some 3.3% percentage points above its regulatory minimum. And yet I still believe that Barclays stock sells too cheaply today.
I’d buy Barclays’ cheap shares, despite their leap
Obviously, 2020 is going to be the worst year for Barclays and its shareholders since the global financial crisis of 2007-09. But that’s all in the past. Buyers of cheap shares today are only interested in the future. In these extreme times, Barclays’ stock cannot be analysed through the usual metrics. But the bank’s market value today is just £18.1bn, which is a petite price tag for one of Britain’s biggest lenders.
In summary, it’s very clear that Barclays will survive the coronavirus crisis to resume paying cash dividends next year. Therefore, I’d buy these cheap shares today (preferably in an ISA) to bank tax-free capital gains, plus the return of juicy dividends for a passive income to retire rich!
Cliffdarcy 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.