Why I've Bought Barclays

Published in Company Comment on 9 July 2012

I've taken the plunge. Should you?

I can just picture the comments to my article now: "What, buy into a bank? Now? Are you off your rocker?"

The news about banks is as bad as I think it has ever been. Reading through the press at the moment, bankers can't seem to get anything right. According to most journalists, the Libor scandal seems to be just more proof of this.

This latest mess-up seems to be just the last in a long line of disasters. There was the Payment Protection Insurance scandal. There was the furore over bankers' pay. And, of course, there was the credit crunch and the continuing fallout over the eurozone crisis.

Twelve rounds with Klitschko

Bankers have taken so many punches, they must feel like they've gone 12 rounds with Vitali Klitschko. And that was before the Libor scandal broke.

And yet, you might be interested to know, I have just bought into Barclays (LSE: BARC). Not a huge position, I must admit, but this is where my latest dividend cheques have gone.

Comparisons have been drawn between Barclays and BP (LSE: BP) immediately after the Deepwater Horizon disaster.

Really? Let's put this into some kind of perspective. For its role in the rate-fixing scandal, Barclays has been fined a total of £290 million. In contrast, BP set aside some £26 billion to cover the Gulf of Mexico oil spill -- some 90 times more!

The numbers are enticing

Yes, there are nebulous rumours of further litigation, but at the moment that is all they are. Now look at the share price. From its 2012 high, the share price has fallen over 35% -- that's a fall of around £11 billion.

On the day the news of the rate-fixing scandal broke, the share price fell 15%. At its current price of 165p, Barclays is now on a trailing price-to-earnings (P/E) ratio of around 4, and is valued at under half its tangible book value.

Instead of comparing Barclays with BP, I would draw a comparison with a maker of a different kind of black stuff.

The Sage and the black stuff

In 1988, Coca-Cola (NYSE: KO.US) had been put through the wringer. It was in the midst of a brutal price war with its arch rival Pepsi. Sales were under pressure as more and more people seemed to prefer Pepsi. This culminated in the fiasco of the launch of 'New Coke'. The mood music was awful, and the brand looked to be in decline.

Yet in 1988, a certain Warren Buffett started buying up Coca-Cola shares like there was no tomorrow. Wall Street thought Buffett was nuts, but that didn't stop the Sage of Omaha. The company turned out to be Buffett's greatest ever investment.

Buffett's skill was finding companies which showed great promise, and then waiting, very patiently, for bad news to hit the company, sending the company's shares lower. When the news was at its worst, Buffett would then seize his moment and buy in.

I feel we are at a similar moment with Barclays. The company currently seems to be swallowed up by troubles, but these are just like clouds passing over the sun. Take your chance to buy, and then wait patiently for the sunlight to burst through again.

Have I moved too soon?

Could I be wrong? Well, of course. It is entirely possible that Barclays' shares could fall further. I don't have to tell you how volatile banking shares can be, and there are likely to be more bumps along the road.

But I'm willing to make my bet, steadily collect my dividends, ride out the volatility and wait patiently for Barclays' strengths in retail banking, credit cards and investment banking to shine through.

Have you bought in, too? Or do you think I have moved too soon, and that the company will get cheaper still? Please share your thoughts in the box below.

Does Warren Buffett's investing style fascinate you? Would you like to read more about the Sage of Omaha? Perhaps you would like to learn about "The One UK Share That Warren Buffett Loves"? Just click on the link to receive our free report.

Further investment opportunities:

> Prabhat owns shares in Barclays and BP.

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

goodlifer 09 Jul 2012 , 11:39am

I hope we're both right'
That's where this month's dividend payments have gone anyway.

RedSF 09 Jul 2012 , 11:58am

Hi there, any views on potential impact of building higher capital levels? What are the chances of a rights issue for Barclays and what facts are available to back up any views?

tux222 09 Jul 2012 , 12:01pm

It was extremely unlikely that 1998 investors in Coca-Cola would later discover that Coke's secret recipe contained Arsenic, or perhaps Plutonium.

On the other hand, how sure are you with a bank that all its metaphorical toxins and things liable to explosive chain reactions are now fully understood and under control, let alone disclosed?

One thing I'm certain of, as a private investor I'll be the very last to know. So I'll pass on bank shares.

SevenPillars 09 Jul 2012 , 12:32pm

If you have a look on the weekly and monthly charts you can see that it is still trending down. You may be a bit early, but there is support on the charts between 130-40 should it go lower. I'd prefer to wait until the charts are a little more positive, especially as it's a bank.

Stubert100 09 Jul 2012 , 1:22pm

I bought a week last Friday when the Libor scandle broke, I'm with you, looks cheap to me at the moment and I may buy some more soon. GLA

F958B 09 Jul 2012 , 1:30pm

Given the tendency for banks to overstretch themselves at least once per decade, I do not regard them as having anywhere near the quality of earnings or resilience of a company such as CocaCola.

When I invest in a business, I like to be able to make an educated guess at what the company's sales, profits and dividend are likely to be for the next few years. With CocaCola and similar "recession-resistant" companies, it's not nearly as difficult as it would be with Barclays.

I won't be buying banks or insurers due to being unable to estimate future cashflows, and therefore unable to put a value on the future value of the company or its shares.

"Banking" on a price rise in the shares in order to be able to dump them on another fool (small F) at a later date is speculating - not investing.

However, with banks having been battered so much for so long, it makes me wonder whether all the bad stuff and more has been priced-in and a rebound is overdue.
As for what the future brings is anyone's guess, so if I was to speculate on bank shares, I'd also make sure that I always had one eye on the exit if I achieved a worthwhile capital gain, and a good stoploss in the meantime in case things get worse.




tendulkar 09 Jul 2012 , 1:46pm

Personally, I think that Barclays is a great buy.

I guess most people on this forum know all about 'Mr Market', well, when the news broke about Barclays libor scandal, Mr Market woke up in a very bad made and wiped off 18% from Barclays stock price - yes 18% - taking its current trading level to below its TBV.

My strategy is simple: Mr Market has again been overly pessimistic and has presented us with a great buying opportunity. My target buying price for Barcalys was 180p, when the stock went down 18% I immediately bought big but I kept (and still have kept) a buffer aside to average out if the stock goes down considerably again... right now I am 4% up and actually wouldn't mind the stock crashing to 155p levels so that I can buy again.

In the long run Barclays will no doubt reach 200 to 210p again which would earn me a cool 35% before dividends. I am very confident about this.

Obviously, if one cannot stomach the expected volatility and average out once or twice in the interim, then do not enter into this stock.

Watch this space!



F958B 09 Jul 2012 , 2:42pm

tundulkar

The problem with financials, is that it only takes a few percent movement in asset prices to reduce their tangible net asset value to zero.
Additionally, with financials in recent years, we can't be sure which "assets" have been marked at actual market prices, and which have been marked at cost price and any losses have yet to be recognised.
This need to book additional losses has recently been a big issue with Spanish banks, who would then need additional capital to replace the make-believe capital which they have previously booked due to intentionally not recognising the losses on property loans.

Basia02 09 Jul 2012 , 3:17pm

I suspect Barclays may be at the same point as BP when they were issuing press saying that they expected they would have to pay £400 million in compensation. this started rising at £100mil a day, and ended up in the Billions.
What will happen at Barclays - who knows? The facts have only just begun to emerge. How successful will the legal actions be in claiming damages from Barclays for inflating the LIbor rate. Watch the US in particuler who love litigation. Nearly every company borrows money based on the Libor rate. Will there also be criminal proceedings?
All this uncertainty makes it a dangerous share. Over the past 30 years I have been both a customer and a Shareholderof Barclays, and have never failed to have been very unhappy with their treatment of me. Based on this I am sure I can find a more enticing prospect amongst the companies out there. One falling knife I will be happy not to catch.

aatiqs 09 Jul 2012 , 3:19pm

I think that this is a lost decade and braclay's wont recover for another few years yet, the difference between barclay's and hsbc is that barclays isn't as global and it's balance sheet looks a bit worrying, nut when times are good in the uk which I don't see for some time as the future is internet capital there won't be as much capital requirements for this in comparison for what it's doing now, interesting one but until the time barclays performs again which could be around 5 to 7 years there are other alternatives which will out do this.

LastChip 09 Jul 2012 , 4:10pm

I'm happy to hold Barclays and have been a holder since January 2009. I bought them at a little over 80p and since then have watched them rise to around 380p and fall!

But even now, I'm sitting on roughly a 50% capital increase and have enjoyed a 23.56% return on my original investment via dividends.

Do I regret not selling somewhere near their peek? Not in the least. I see this as a nice steady investment (in dividend terms) that will play a part in supplementing my pension.

Longer term, I think the author may be right. Now could be a very good buying opportunity, though with my present holding, I won't be joining the party.

The truth is, we need banks (listen to this weeks pod-cast) whether we like it or not. Take out the rhetoric and decide whether it's an investment risk worth taking or not. Personally, I don't see it as being particularly risky.

F958B 09 Jul 2012 , 4:50pm

LastChip

Banks certainly can be risky. Barclays were fortunate in not being significantly nationalised to keep them afloat - as holders of RBS and LLOY have discovered.
So while banks are essential, they are still at risk of being nationalised.
As time passes, the banks can gradually rebuild their capital bases, making them much more resilient to future financial crises. So the longer the banks can go before the next major Euro-debt-forgiveness in one of the PIIGS nations, the better the chance that they won't need to be significantly nationalised.
But I suspect that in a decade's time, we'll be having this conversation again, after the next bubble bursts and banks take the hit.

LastChip 09 Jul 2012 , 7:07pm

F958B it seems you haven't grasped the fundamentals of how society in the upper classes works.

The institutions, whether it be banks or others control countries. Don't let political rhetoric confuse the issue. Just like your wife or partner, you let them believe they're in charge, but in the case of politicians, nothing is further from the truth. They are succinctly controlled by the suits, through all sorts of channels. Some more obvious than others. There is not a cat in hells chance banks will be nationalised, certainly in the UK anyway.

Europe's a mess and will implode, it's just a matter of when. Banks will have some exposure to Europe when that happens, but I rather suspect it will be minimal by then. They've been seriously reducing their exposure for months.

You have to look at the risk in its entirety, not just through a balance sheet.

F958B 09 Jul 2012 , 7:57pm

LastChip

How does your "banks cannot be nationalised" reconcile with the devastating losses suffered by many bank shareholders - both UK and in other nations - as a result of the governments taking a large stakes in them in 2008-9?

Banks have an erratic history of returns for shareholders (the value of the shares or the dividends) - as do insurers. Many financials' share prices have been set back decades.

You only have to look at the high-yield discussion boards to see a lot of damage caused to portfolios by the financial implosion. It will take a very long time for that damage to be repaired.

So I think it's fair to say that I don't have the same grasp of this as you.

goodlifer 09 Jul 2012 , 8:19pm

I think tendulkar's got it about right.

At less than six times earnings, with a decent yield and dividend generously covered, they look like a reasonable long term buy.

What of Barclays in 5-10 years time?
Will they go down the tube like Northern Rock, Woolworths or Marconi?
Will Episode Diamond turn out to be a mountain or a molehill?

Nobody knows, least of all me.
But where certainty's not available I'll go for what's most probable.

So my view is: don't bet the farm, but at their current price there's room for some in a reasonably diversified portfolio.

Unless of course you know better.

LastChip 09 Jul 2012 , 9:16pm

FS958B, I cannot see where I said banks "could not be nationalised", what I am saying however is, in my view they "will not" be nationalised. There is a difference.

Furthermore, this article is not talking about what's happened in the past. It's referring to what is happening now, and therefore whether Barclays are good value at present or not.

It's a bit like saying Vodafone is great value now, but I can assure you, because I bought them many moons ago, they have turned out to be a lousy investment. However, if you'd bought them (say) 12 months ago, I suspect you'd be rather pleased and have a different view.

This proves to me, without any reasonable doubt, it does matter when you buy and more specifically, at what price. I do not share the Fools view that price doesn't matter too much and over time, all will be well. A decade of a stagnant returns rather dispels that.

It's my view Barclays could be reasonable value at todays price, clearly you disagree. I don't have a problem with that.

F958B 09 Jul 2012 , 9:30pm

LastChip

I'm not necessarily disagreeing about Barclays *appearing* to be good value.

My concern is that there are a lot of unknowns on their books, with a lot of unknowns ahead. The numerous unknowns could easily wipe out the capital base - and therein is the risk.

Lots of potential reward, but lots of potential risk - risk that could literally strike like a bolt out of the blue.

I'd prefer to sit this one out.

However, I was chatting recently about the banks, saying to someone that even a contrarian like me has very little interest in them. So they could turn out to be a super-contrarian bet because nobody - not even contrarians - has any interest in them.

BILLFISH99999999 09 Jul 2012 , 10:39pm

I am realy surprised to see this share recommended by MF.

As well as checking the figures for a business one should also do, for want of a better word, "the numpty test" on a business. I.E. is the business being run by competent people for the benefit of the shareholders.

Barclays fails this test.

You may or may not be aware that over the past few months barclays have been writing to their SIPP, Isa and stockbroking clients REQUIRING them to sign a form agreeing to have their accounts transferred to Barclays Bank if they wished to continue to operate those accounts.

In exchange for signing the forms those customers will have the protection of having their money held inclient segregated accounts REMOVED and become unsecured creditors on barclays bank when it is liquidated. They will have a sum total of £85,000, across ALL their accounts protected by the ICS, any sum above that have the status of unsecured creditor.

The type of cutomer that holds SIPP, ISA and stockbroking accounts are the very type of cutomer that Barclays should be attracting. Instead they are coercing them to flee the bank for more enlightened providers who understand that from time to time as market conditions dictate larger sums of cash may require to be held in those types of accounts, all be it on a temporary basis.

Removing the protection of the client segregated accounts and unneccessarily exposing their customers to the risks associated with an increasing disreputable organisation is not the actions of a business that is going to grow in the future.

This action is going to cost the Barcalys shareholders millions in lost revenue and profits as those clients move some or all of their accounts to other providers to mitigate the ICS limit that they now find themselves unneccessarly exposed to.

Defiitely not a share to buy for the future.

ini1 10 Jul 2012 , 2:36am

I'm certainly not buying now, not because of the LIBOR scandal alone, but Italy, Spain, and Portugal, not to mention the over 1 trillion cuts, expected in the US, to beginning from January.

tru2me 10 Jul 2012 , 10:23am

An interesting banter between LastChip, tendulkar and F958B.

Surely what both sides of the discussion come down too when all is said and done is that huge word in investing, TRUST.

I am with F958B, do not trust banks.

countalucard 10 Jul 2012 , 4:17pm

What do other fools think about lloyds bank?I believe they are less exposed to investment banking.A potential buy possibly?

F958B 10 Jul 2012 , 4:52pm

countalucard

I'm not particularly interested in any financials because I cannot put a value on them because I don't know what kind of toxic waste sits in their acounts.
They may well all be so severely battered in terms of price and sentiment that "the only way is up" - but I like to be able to put a price tag (either absolute or relative) on a company, based on a detailed analysis of its accounts.

alarmbells 11 Jul 2012 , 11:30am

The writer has bought BARC because he's done no analysis. He's taken a lazy approach that can be summarised in his (pathetically weak) argument.

1. Barclays has gone down in price.

2. Warren Buffet buys some companies that have gone down in price.

3. Therefore BARC is a bargain!

As Sherlock Holmes would say: "that ain't deductive reasoning - it's 24 carrot gold nonsense!"

You may or may not be right about BARC - but for all the wrong reasons.

brightncheerful 11 Jul 2012 , 11:58am

The late Sir David Money-Coutts (obituary in last weekend's FT) said (during his lifetime) "Brokers try to flog you things; good advice costs a lot less".

goodlifer 11 Jul 2012 , 12:59pm

alarmbells

"The writer has bought BARC because he's done no analysis. He's taken a lazy approach that can be summarised in his (pathetically weak) argument.

1. Barclays has gone down in price.
2. Warren Buffet buys some companies that have gone down in price.
3. Therefore BARC is a bargain!
As Sherlock Holmes would say: "that ain't deductive reasoning - it's 24 carrot gold nonsense!"

Do you honestly think that's an accurate summary of the writer's thinking?

ps200 11 Jul 2012 , 2:18pm

alarmbells,

Sometimes I despair!! Warren Buffett's approach is basically to pinpoint shares which are good value, and which show promise for the future. But he doesn't buy straightaway, preferring to wait patiently for temporary bad news which causes the share price to crash.

This is exactly what he did in 1988 with Coca-Cola, when this company was hit by a flurry of bad news. He could see what others couldn't - that this bad news was temporary, and that Coca-Cola was a fundamentally strong company with great propects.

I think the same about Barclays. The news about Barclays has been dreadful. Now some might think that this means that Barclays is finished as a company. If you believe this, then of course you wouldn't invest in the bank.

But I think that we are close to the low point for Barclays, and that this company has strengths in retail banking, credit cards and investment banking which mean that, long term, this business has a great future.

You can call it nonsense if you like, but over the next few years we will see who is right.

Prabhat.

couldnotmakeitup 11 Jul 2012 , 5:35pm

Some fascinating comments from the MF community on the above article.

May I pose a question! I have a small number of shares in Barclays
purchased in 3-4 lots over the past 3-4 years ranging in price from
£1.70 to £3.30. Now I am tempted to further average down, but what troubles me is that I basically think
F958B/Basia02/BILLFISH99999999/ram59 are probably right
in their assessment. But perhaps more importently one of the regular
MF commentators recently advised when it comes to investing: buy the
company not the shares! With the news coming out of Barclays
over the past four years and and their seemingly irresponsible
senior managers could anyone in their right mind even contemplate
buying their shares! Am I nuts or what? Any comments appreciated!

Regards

Ben

goodlifer 11 Jul 2012 , 7:56pm

Prabhat,
"I despair."

Relaxez vous.

What does Great Uncle Ben say?
In business "You are neither right nor wrong because the crowd disagrees with you.You are right because your data and reasoning are right."

Sad to say, many of "the crowd" are past praying for - they know it all already anyway.
The most we Fools can hope to do is share our ideas and help one another try to think straight

goodlifer 12 Jul 2012 , 1:55pm

couldnotmakeitup
" With the news coming out of Barclays over the past four years and and their seemingly irresponsible senior managers could anyone in their right mind even contemplate buying their shares!"

Well, possibly.

Uncle WarrenI says he "tries to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."

Perhaps banks are in that category?

Perhaps too Barclays may, sooner or later, acquire more competent management?

Or perhaps not?

The futures's not ours to see.

Lanyard 12 Jul 2012 , 5:38pm

User F958B hits the nail on the head. The numbers are dirty. As a punt and a trade that's fine, enough said. A medium/long term buy? Yes of course but not at £1.60 odd. There are massive headwind for this company now. If being a bank wasn't difficult enough as it was, Barclays has now shot itself in the shot as well. Vickers, compensation and European cock up are all on their way.

couldnotmakeitup 12 Jul 2012 , 8:15pm

goodlifer

Thanks for the comment.

I think I will hang back for a while, let the situation develop.

If i missed an oppurtunity so be it.

Regards

Ben

goodlifer 15 Jul 2012 , 9:24pm

couldnotmakeitup

"I will hang back for a while, let the situation develop."

When I do that I generally get "overtaken by events."

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.