Over the past year, owning shares in Barclays (LSE: BARC) has been rewarding. The Barclays share price is up 80% during the past 12 months alone.
The share price recently passed £3. Where might it go from here – and should I buy some now?
A long way down over time, but making good progress
Go back over 20 years and Barclays shares were within spitting distance of changing hands for £25 apiece at one point. How the mighty have fallen (along with UK banking peers including Lloyds).
Still, the share price performance over the past year has been outstandingly good.
Over the past five years, the price has more than doubled.
The investment case here is pretty straightforward. Barclays has a strong brand, large customer base and diversified banking operations.
Retail banking can be lucrative but it also faces eternal risks, like economic downturns pushing up loan defaults. What sets Barclays apart from many UK rivals is that it also has a sizeable international investment banking operation.
That can make shedloads of cash when times are good (its income last year topped £11bn). But investment banking can be a fickle business, especially when the economy struggles and deal-making dries up.
Still, Barclays continues to do well, in my view. Last year’s basic earnings per share (EPS) rose a very impressive 30% to 36p.
The share does not look expensive
That means that the bank trades on a price-to-earnings (P/E) ratio of under 9. That looks potentially cheap.
But to value bank shares many investors prefer to look at the price-to-book value. Here too, Barclays currently looks cheap.
So, even after it soared in the past year, I still think the price of Barclays stock looks potentially cheap. From here, could it hit £5?
On current earnings, that would imply a P/E ratio of 14. That is pricey compared to UK banking peers, although lower than US pure investment banks such as Goldman Sachs.
But Barclays is UK-listed and not a pure investment bank. So I think a P/E ratio of 14 seems too high to justify in the current market.
Still, if it keeps growing earnings strongly, that could justify a higher valuation without a much higher P/E ratio. £5 might be hard to reach, but another year of 30% basic EPS growth could propel Barclays towards a £4 share price.
For now I’m in wait-and-see mode
I have felt bearish about banks for a while. That is why I have missed out on the strong performance of Barclays and UK rivals over the past year.
As its performance last year proved yet again, Barclays has serious money-making potential and a well-proven business model.
Still, while my nervousness about the outlook for the banking sector has so far been confounded by events, I remain uncomfortable.
The global economy is facing multiple sizeable geopolitical risks and to some extent we are simply guessing as to what that means for economic performance.
The risk of a financial slump and sharp growth in loan defaults continues to put me off. For now, although I think Barclays shares may move higher, I will not be adding them to my portfolio.
This post was originally published on Motley Fool
