Back in January, I bought some Barclays (LSE:BARC) shares for my portfolio. Fast forward a couple of months and I’m up close to 20%. With the Barclays share price now at 52-week highs above 180p, some might think it looks a little bit overbought. Here’s why I disagree, along with where I think the stock heads next.
Restructure news taken well
I wrote in detail about different reasons why I thought the stock was undervalued back at the start of the year. One of them was the strategy refresh that was due out in February. Now that we’re in March, I can look back on the details.
The CEO commented that he’s pushing for a “simpler, better, more balanced bank”. The efficiency drive will aim to cut £2bn worth of costs. This is split between staff cuts, infrastructure savings and office space.
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Investors took this update well, which I thought would be the case. Even though it might hamper short-term financial results, it’ll drive long-term value for the bank (and shareholders).
As we get more updates on how this strategy shift’s progressing, I expect the share price to continue to rally. Of course, if a statement shows that costs are ballooning, or that something’s gone wrong, this won’t be good. But as long as the management team sticks to the plan and executes it well, I think this is a positive going forward.
It’s still undervalued
Even with the rally in the past few months, the stock’s still undervalued in my view. The price-to-earnings ratio is 6.55, well below the benchmark figure of 10 that I use to judge a fair value. The price-to-book ratio is 0.4, again well below where I believe it should be in the long term.
Sure, the 33% move higher in the past year has reduced how much of a bargain the banking stock is. But when I look forward, I don’t believe the rally has a reason to stop based on the valuation. If anything, I think the current value indicates that a further jump’s coming over the next few months.
Granted, no stock moves upwards in a straight line. I’m not suggesting the stock won’t suffer some down days along the way. But I think the share price trajectory’s still firmly up.
Watch out for results
This time next month we get the Q1 results release. The are a potential risk. The business could disappoint investors, based on UK performance. After all, the country’s currently in a recession, so spending and loan defaults could have risen in Q1.
This would be a negative for the bank, although it could be overlooked by positive news regarding higher net interest income. Either way, it’s an event I’ve got pencilled in my diary.
Based on the benefits of the restructure and the (still) low valuation, I think the Barclays share price might continue to push higher.
