In Q1, I bought shares in Barclays (LSE:BARC). Since then, the share price has outperformed the FTSE 100 and has risen by 42%. Over a broader one year period, the stock is up by 33%. Even though I’m happy with my purchase, I still think it’s an undervalued UK stock that has the legs to push even higher. Here’s why.
Recent outperformance
Let’s first discuss why the stock has done so well in 2024. Part of this comes from the momentum that the bank gained in 2023. With interest rates here at home and abroad at elevated levels, the bank benefitted from higher levels of net interest income. This refers to the money made from paying clients for deposits then loaning the money out at a higher rate. Higher interest rates provide a larger margin to be made here.
Even though this provided a boost for the 2023 financial results, investors were also focused on how Barclays was going to restructure operations. The sprawling bank wasn’t efficient and this was reflected in the low price-to-book ratio for much of the past year. This ratio compares the book (similar to a net asset value) of the firm, to the share price. The lower the ratio, the more undervalued the stock potentially is.
The management team recognised the need for change and in February a host of cost cutting and efficiencies measures were announced. It didn’t surprise me that the share price rallied off the back of this, as it’ll make the company a leaner and more profitable organisation in coming years.
Why I think it’s still good value
Despite the jump, I still think the stock is cheap. For example, the price-to-earnings ratio is 7.20. This is still well below the benchmark figure of 10 that I use as a fair value. In order for this to move higher, I’d expect the share price to keep rallying.
I also think the stock is good value when you consider the limited risk that interest rate cuts could pose. In theory, the cuts coming this year should act to decrease profitability for the bank. Some flag this up as a major risk. Yet the research team at J.P Morgan recently commented that lower rates shouldn’t be a large negative due to the hedges that have been put in place. A hedge is a protective trade that’s almost like a form of insurance.
Further, from the data looked at so far this year (e.g deposit pricing and mortgage competition), the team don’t see any issues with the net interest margin. Therefore, I think some of the pessimism associated with lower rates is misplaced. Once investors see that Barclays is doing well despite this, I think the stock will jump further.
Bringing things together
Of course, there are still issues. Banking is a competitive landscape. With Lloyds Banking Group making a continued push in the retail space, Barclays could lose market share in this area as it’s more spread out in terms of servicing various types of clients.
On balance, I’m happy to hold my shares and feel that investors should consider adding it to their portfolio.
