The news that Barclays PLC (BCS) might have manipulated the LIBOR Index, has sent the stock sharply lower and the company into turmoil. A couple of top-level members of management have resigned over the incident, and things could get worse before they get better. Former CEO Bob Diamond has resigned, and is set to testify in front of Parliament. While it might look too risky to think about buying shares of Barclays at a time like this, historically, investors can make big gains when buying cheap stocks just as other investors are fleeing.
Consider that when the hacking scandal broke at News Corp (NWS), the shares were sold by many investors, when they should have been buying. News Corp shares are considerably higher now and most investors are focused on a potential break-up rather than the scandal. How about when Wal-Mart (WMT) announced that its management might have been paying bribes in Mexico in order to open stores faster. That stock was suddenly hit hard by panicked investors and fell to about $57 in April. Just weeks later, the stock was hitting new 52-week highs at $70.77 per share and anyone who bought into the "crisis" ended up profiting handsomely for it.
Barclays seems to have similar potential now. Here are 3 reasons to consider the shares now:
1. Barclays shares are just plain cheap. The company is solidly profitable and the stock is trading for about 4 times earnings. Recently, Barclays posted better than expected financial results. For the first quarter of 2012, the company earned 2.45 pounds which was considerably higher than analyst expectations of 1.98 pounds. In another sign of undervaluation, the stock trades well below book value, which is $28.61 per share.
2. Barclays has a solid balance sheet with about $1.57 trillion in cash and $1.5 trillion in debt. The size of this balance sheet is enormous, and a company like this will naturally have exposure to risks that face the Eurozone. One recent report states that Barclays could face losses of about 37 billion Euros, if a member country were to leave the Eurozone. The size of this potential loss is likely far more than the fines of about $450 million, over the LIBOR scandal.
The risks presented by the Eurozone are a huge factor in Barclays currently low valuation. But, if Europe stays together, the discount on the stock will fade over time. A Greek exit may already be priced into the shares now, and other Euro members are less likely to exit, so the shares might be too low consider that there is still a strong chance that Europe will cling together.
3. The LIBOR scandal has already brought management changes, but the company itself could see even more changes, possibly for the better. Some believe that Barclays should be split into two separate banks so that consumer banking and investment banking activities remain separate. Since many believe that some banks are "too big too fail", there could be a future trend to separate and spin-off different divisions, which in turn could unlock shareholder value.
Barclays has a strong brand franchise that is recognized around the world. While the headlines are likely to keep the stock under pressure, investors who can stomach some volatility might want to consider buying the shares on dips and average in over time. In time, the headlines will fade and investors will focus on the fundamentals like earnings. In the meanwhile, investors will be paid a solid dividend yield of 2.3%, while waiting for a higher share price.
Key Data Points For Barclays:
- Current Share Price: $10.54
- 52-Week Range: $8.38 to $16.41
- Dividend: 25 cents which yields 2.3%
- 2012 Earnings Estimate: $2.45 per share
- 2013 Earnings Estimate: $2.85 per share
- P/E Ratio: about 4 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.