If there’s one man to turn to for inspiration when it comes to investing, it’s Warren Buffett. He started out with just a few dollars and turned it into a 12-figure net worth.
His track record with Berkshire Hathaway is incredible. He averages returns of 20% a year. That’s double the S&P 500.
But what might he make of UK-based international bank Barclays (LSE: BARC)? Its shares have soared 18.95% in the last 12 months, far outpacing the FTSE 100.
Here are two reasons I reckon a mega-investor like him might love the stalwart bank, and one obvious reason he might not.
Reason #1
Buffett says investors should only buy companies when they understand the business and how it makes money. That’s the first reason I reckon he’d be keen on the stock.
With banks, it’s easy to comprehend how they generate revenue. I suspect that’s why Buffett owns over $3.2bn in Citigroup stock.
Barclays makes money through earning interest on loans. Last year, it was able to charge customers more when lending due to higher interest rates. As such, its net interest income rose 20% year on year to £12.7bn. It also specialises in areas such as investment banking and wealth management.
What’s more, the business has streamlined its operations in recent times. Going forward, it will operate under five divisions: UK Consumer, US Consumer, UK Corporate, Investment, and Private & Wealth.
This will help make the company more accountable and “provide an enhanced and more granular disclosure of performance”.
Reason #2
The second reason is because he likes to buy stocks with cheap valuations. He focuses on companies that he believes are undervalued compared to what they could be worth in a decade or more.
Barclays ticks that box with a price-to-earnings ratio of just 6.8. That’s comfortably below the benchmark for value of 10. It’s also less than the Footsie average of around 11.5.
To go alongside its cheap valuation, it’s also implemented a major cost-cutting initiative that aims to deliver annual savings of £2bn by 2026. That should provide a boost to profits.
But its progress could be hindered by a few things. Firstly, falling interest rates will impact the bank’s earnings and squeeze its margins. More widely, I’m expecting further short-term volatility for UK banks in 2024 as economic uncertainty rumbles on.
Nevertheless, at its current price, I see long-term value in Barclays and reckon Buffett might too.
A sticking point
Of course, there’s one reason Buffett would probably never buy Barclays shares is that it’s a UK-listed company.
In true fashion of sticking to what he knows best, Buffett largely tends to steer away from buying companies listed outside the US. He’s reminded investors on numerous occasions to never bet against America.
Value out there
But for UK investors, I don’t see this as an issue. Granted, the domestic economy has lagged in recent years. But I see sentiment picking up in the years ahead. What’s more, as Barclays stock shows, there’s plenty of value out there at the moment that investors can capitalise on.
Whether Buffett would approve of Barclays stock is unknown. What I do know however, is that if I had the cash I’d buy its shares today.
