As a veteran value investor, I’m always hunting for undervalued, unloved and unwanted shares. But I’m not looking to ‘catch falling knives’ or go ‘dumpster diving’. I’m after lowly rated stocks in of solid companies, typically those in the elite FTSE 100 index.
Filtering the FTSE 100
Generally, my forages through the Footsie focus on two fundamentals. First, shares rated at low multiples of their earnings. But of course, some stocks may have lowly price-to-earnings ratios because these companies have poor prospects.
Second, I look for stocks offering decent dividend yields. Right now, the FTSE 100 offers a cash yield of around 3.7% a year, so yields above this level catch my eye.
Of course, this twofold approach is simplistic, so I don’t rely on it exclusively when picking stocks for my family portfolio. Once I have a list of candidates, I review each business in depth, checking balance-sheet strength, cash flows, revenue and earnings growth, and so on.
Banking shares get battered
In recent months, every time I filter the FTSE 100 for value shares, one stock keeps coming up repeatedly. This candidate is Big Four bank Barclays (LSE: BARC), valued at £24.9bn today.
Go back over three months and Barclays shares were riding high. Indeed, they hit their 2023 peak of 198.86p on 8 March. But within days of this pinnacle, three mid-sized, tech-focused US banks failed. Of course, this crisis sent financial stocks plunging worldwide.
Barclays shares duly followed suit, crashing to a 52-week low of 128.12p on 20 March — just 12 days after their 52-week high. At the time, I thought this was crazy, but lacked the spare cash to wade into the market to buy Barclays shares.
For the record, the stock is up 1.5% over one year, but down 22.3% over five years.
It looks like a big bargain
By the way, my wife bought Barclays stock at an all-in price (including buying commission and 0.5% stamp duty) of 154.5p in July last year. Hence, it would be easy to accuse me of ‘talking my own book’ by praising the Blue Eagle bank’s stock. But I’m convinced that it really is a bargain buy.
So why would I buy more Barclays shares today if I had money to spare? First, at the current share price of 160.06p, this stock trades on a price-to-earnings ratio of just 4.9. That translates into a bumper earnings yield of 20.4% a year.
Second, its shares offer a dividend yield of over 4.5% a year. Third, this cash yield is covered a whopping 4.5 times by historic earnings. To me, this is a huge margin of safety.
Finally, Barclays’ balance sheet is as strong as its been for decades, being packed with high-quality liquid assets — and safe (even boring) homebuyer mortgages.
We’re in Barclays for the long term
Then again, I’m not expecting Barclays to have an easy time in 2023-24. It includes a major investment-banking operation, whose earnings can be very volatile during market wobbles. Also, as a leading UK lender, I expect Barclays’ profits to be hit by higher bad debts and loan losses this year.
Even so, as long-term investors, my wife and I plan to hold this share for at least five years, collecting juicy cash dividends as we go!
