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He Barclays (LSE:BARC) has had a good run, up 42.89% over the past 12 months. Given its runaway success, I expected it to be expensive. However, its current price-to-earnings ratio is just 8.19, about half the average. FTSE 100 Index average of 15.4 times.
The stock also looks cheap judging by the price-to-book ratio, which stands at just 0.5. That's exactly half of the figure of 1 that is considered fair value. This suggests that Barclays has further room to grow.
Of course, indicators like these are far from infallible. Financial services stocks have looked undervalued for years. The financial crisis still casts a shadow. Post-Brexit negativity about the UK economy didn’t help. Neither did the cost-of-living crisis.
Stocks still look cheap
While rising interest rates boosted banks' net interest margins, a key measure of profitability, they also raised concerns among investors about a recession and worsening debt.
I have had the feeling for some time that the negativity has been exaggerated, especially since the UK recession was relatively short, house prices did not collapse and banks' provisions for debt impairment were not necessary.
FTSE 100 banks have had a good year overall. NatWest Group The share price has risen by 41.22% in 12 months. Lloyds Banking Group Shares are up 31.03%. Both look cheap too, trading at 6.83 and 7.64 times earnings respectively.
Some investors consider the discounted cash flow (DCF) method to be the best way to judge a stock's potential. In this respect, Barclays appears to be at the top, undervalued by 68%, compared with 60% for Lloyds and 39% for NatWest.
Judging by these various metrics, Barclays stock could have much further to run. Again, they are not foolproof. We may have to accept their lower valuations and look for better measures of their potential.
Brokers remain bullish on Barclays. Analysts covering the stock have set an average 12-month target price of 272.3p, which is a 20.26% increase from the current price.
Banks are much less risky than before, having built up strong capital buffers since the financial crisis. During last year's banking crisis, the sector was an oasis of calm.
Riskier, but more rewarding actions
However, Barclays carries a bit more risk than Lloyds and NatWest, because it still retains an investment banking division. That also increases the potential rewards. I own shares in Lloyds, but sometimes I wonder if they are a bit solid.
One downside to Barclays' recent share price rally is that the yield is rather mediocre at 3.53%. Markets are forecasting it to reach 3.84% in 2024 and 4.16% in 2025. However, this is still not an unreasonable figure.
In 2023, Barclays reported annual sales of £25.38bn. Worryingly, growth appears slow, with analysts forecasting only a small jump to £25.88bn this year, and then a bigger jump to £27.36bn in 2025.
Stocks are also at the mercy of macroeconomic factors such as the state of the global economy and the speed with which central banks cut interest rates. Lower rates will squeeze margins, which have already begun to fall, especially in the mortgage market, where competition is intense.
I would happily buy Barclays shares despite these risks. The only thing holding me back is that I already have a lot of exposure to this sector through Lloyds.