2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 6.9% this year, and is 50% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like Barclays (LSE: BARC) (NYSE: BCS.US) still offer good value, after five years of market gains.
Back to basics
Barclays’ share price has fallen by 8.8% this year, but it’s up by a FTSE-beating 69% on five years ago, despite a litany of scandals, fines and regulatory threats.
Billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
Buffett made some shrewd and successful investments in banks in the wake of the financial crisis, and as potential buyers of Barclays, our job is to forget historic price movements and look at what we can buy for our money today:
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 9.9 |
| Trailing dividend yield | 2.5% |
| Cost to income ratio | 66% |
| Net interest margin | 1.8% |
| Price to tangible book ratio | 0.86 |
Barclays’ looks pretty cheap on these measures, in my view, although there are some weaknesses. Barclays’ net interest margin of 1.8% is substantially lower than other UK-listed banks, which average 2.2%.
Barclays’ discount to its tangible asset value is also a risk factor, as it suggests that market fears further bad debts that have not yet been uncovered. However, this discount also offers potential upside for investors brave enough to buy at this price — once the market is satisfied there is no more bad news, there will be no discount, either.
Overall, I think that Barclays’ low P/E and rising yield are sufficiently attractive to offset the risk of further asset write-downs, especially following Barclays’ rights issue earlier this year, which significantly strengthened its balance sheet.
Shareholders could profit in 2014
Next year could be the year that Barclays starts to come good. Forecasts are bullish and analysts are expecting significant dividend growth, in-line with the firm’s stated policy. The result is that Barclays’ shares look very cheap, based on the latest forecasts:
| 2014 Forecasts | Value |
|---|---|
| Price to earnings (P/E) | 8.3 |
| Dividend yield | 4.2% |
| Earnings growth | 19.1% |
| P/EÂ to earnings growth (PEG) | 0.4 |
You could almost argue that these figures look too good to be true: will Barclays really be able to deliver on these extremely attractive numbers?