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A few folks seem to think that my Barclays bearishness is wrong and that this stock is as cheap as chips. Presumably that would be chips from the Casino that is Barclays Capital (LSE:BARC). We shall see what happens to the share price on a one year view. But to counter the points of the stock market optimists, I offer up a few more thoughts.
The bull thesis is that Barclays trades on a PE of 7, yields 3.75% and has a net asset value of £3.50 per share upwards and that it should thus be bought because all the hoo-hah about rate fixing, Bankster Bob Diamond etc means that the stock is oversold relative to fundamentals. I know this to be the view of the bear raider Evil Knievil and others who are not daft but I disagree.
And that is because I do not believe those numbers. There are three risks Barclays faces:
1.That vote chasing politicians will regulate and smash it as much as they can. I am not sure of the impact on earnings but it will not be positive.
2. That the merde in the Eurozone will – as the Bank of England quite correctly warns – cause all UK banks massive write downs and losses forcing them to be recapitalised. I am afraid that I would regard this as almost inevitable. By recapitalised I mean bailed out by the ever grateful taxpayer.
3. Barclays specific. What off balance sheet and derivatives exposure has this company got? What exactly has Barclays Capital been involved in. Are there any more LIBOR type scandals waiting to emerge? Will there be further fines and potentially lawsuits relating to what we already know, let alone what we do not know?
Point 1 may slow future earnings growth but I shall ignore it for now. Points 2 and 3 are the critical ones. The fact is that there are any number of things which might force Barclays to make vast write downs. At that point (even assuming that there was no need to recapitalise it) it is not on a PE of 7 it is loss making. At that point there could be no justification for paying any dividend so that yield goes up in smoke. And at that point the effect on NAV would be dramatic and negative.
If there is a need to recapitalise life gets worse. You have already kissed goodbye to your dividend. By definition – at this point – NAV has been smashed to pieces – there is no asset backing at all. And as a bonus you will then be massively diluted merely to ensure survival.
Of course this may not happen and Barclays may be cheap. But you are gambling here and as a risk reward play it does not appeal. You could get a far better yield from, say, GlaxoSmithKline where there is earnings visibility, the dividend will increase in real terms and there is real asset backing which will not go away. You do not have to own any share and this is one for gamblers only. Not for value investors.
