At first glance, I think the Barclays (LSE: BARC) share price looks cheap. It’s currently trading at a discount of more than 50% to its book value. This implies the business could be worth more if it was broken up and sold piece by piece.
Of course, this is unlikely to happen, at least in the near term. As such, using book value to work out how much the bank could be worth is a bit misleading.
The business behind the Barclays share price
A better way to understand how much the business could be worth is to look at its profitability. Here, Barclays is struggling. The group has two main income streams, lending to customers and its investment bank.
To a certain extent, the profitability of the lending business is determined by central bank policymakers, who set the country’s interest rates. Higher rates could mean larger profit margins for the lender. Low rates usually translate into lower margins.
Unfortunately, that’s just what’s happened over the past decade. Interest rates are currently at record low levels, and it doesn’t look as if they’re going up any time soon. I think this will impact Barclays’ profitability for years to come. While the group’s investment banking business has picked up some of the slack, this might not last.
Of course, this is only my assessment of the situation. There’s a chance interest rates could jump in the next few years. That would help widen the bank’s profit margins, leading to improved investor sentiment towards the Barclays share price.
The group may also see a better-than-expected period of profits from its investment bank. This may also help improve investor sentiment. However, there’s a lot of uncertainty here. That’s why I’m going to avoid Barclays for the time being.
FTSE 250 growth stock
Instead of throwing my weight behind the Barclays share price, I’d buy FTSE 250 growth stock IG Group (LSE: IGG) instead.
I think this company has two key advantages over Barclays. For a start, its main business is providing stock trading services for customers.
While this is a highly competitive business, the critical difference between IG and Barclays is the former can set its own costs and charges. It’s not reliant on central banks to set interest rates. In my opinion, this means the group has more control over its future.
Thanks to these advantages, the FTSE 250 growth stock already trades at a higher valuation than the Barclays share price. It’s trading at three times book value. As I mentioned above, this figure can be a bit misleading when used for valuations, but as a rough guide to gauge investor sentiment, the difference is revealing.
That’s not to say IG doesn’t face any risks of its own. It does. A few years ago, group profits plunged when regulators introduced new rules to cap the selling of leveraged derivates to clients. Additional regulatory constraints could emerge at any point. A sudden bout of market volatility, leading to large client losses, may also weigh heavily on the FTSE 250 organisation.
Despite these risks, I think IG is a better investment than the Barclays share price. That’s why I’d buy the FTSE 250 growth business for my portfolio today.
