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The Barclays (LSE:BARC) share price has shot up 59% over the past year. With the stock now at 370p, it’s back to the highest level since the global financial crisis back in 2008. Granted, a lot has changed in the world of banking and finance since then. But it’s worth investors taking a pause and thinking about the next direction of travel for the stock in the coming year.
How we got here
Let’s quickly run through the recent rise in the share price. The bulk of the move can be assigned to positive investor sentiment regarding the turnaround plan initiated around a year and a half back. This has seen job cuts and other organisational efficiencies put in place. It’s now starting to yield progress.
Another factor has been the benefit from higher volatility in global markets. Barclays has a large trading and capital markets division. The higher volatility helps to push client activity up, boosting revenue for this key part of the bank. Evidence of the overall boost can be seen from the Q2 results. It reported profits of £1.7bn for the quarter, up 34% from the same period last year.
Finally, the tepid pace of interest rate cuts so far from the Bank of England has helped in slowing down the hit to net interest income. Previously, many of us had thought rates would be slashed quickly. This would have been a negative for the bank. Yet the slower pace (partly due to higher inflation) has caused investors to re-adjust their expectations.
Valuation suggests room to run
Even though the stock’s at an elevated level, valuation metrics don’t concern me too much. For example, the price-to-earnings ratio’s now 10.31. I use 10 as a benchmark figure for fair value. So although the bank isn’t undervalued, it isn’t overvalued either. This means the stock could keep rallying from here before it starts to look a bit rich, value-wise.
It has a price-to-book ratio of 0.69. This looks more at the share price in relation to the book value of the company. Typically, I’d expect a bank like Barclays to have a ratio around 1. So again, this valuation metric doesn’t indicate the share price is too high.
Diversification needed
Of course, buying any stock at multi-decade highs does come with risks. At a company-specific level, there’s the worry around regulatory breaches and fines that can damage reputation. A recent £42m money laundering fine for the bank is evidence of this.
One way an investor can look to reduce the risk of the stock falling is to own a selection of banking stocks in a portfolio. This can help to reduce the impact of Barclays’ underperformance. Alternatively, if an investor has a high enough conviction, it’s still worth thinking about owning the stock in its own right.
