Buying low on Barclays PLC (BCS)?

Speaking at a banking conference in Frankfurt, Mario Draghi said the European Central Bank would “do what we must to raise inflation and inflation expectations as fast as possible.”

On January 1st, 2007, Barclays PLC (NYSE BCS) traded at an all-time high of $54.37. Exactly two years later, in the depths of the financial crisis, the stock was at $5.26. Shares of BCS rallied like most stocks in 2009, but has languished since. The stock is down -30% from its price 5 years ago, is down another -18% this year and currently sits at $14.82 as of Friday’s close.

Barclays hasn’t performed quite as poorly as its large European Banking peers Credit Suisse and Deutsche Bank, but they have greatly underperformed their US Banking counterparts. It’s maybe a bit unfair to compare their performance to US Banks, but they have significant exposure to the region. They have also trailed the FTSE 100 by close to 50% over that same 5 year period.

Barclays has had a bag of issues since the financial crisis. The biggest being lack of economic growth in just about every region they do business other than the U.S. They have had lingering litigation issues from the financial crisis, including $450 million in fines earlier this year for their role in selling mortgage backed securities to Fannie Mae and Freddie Mac. More recently, they have been fined by the Financial Conduct Authority for fixing Gold prices, they are facing litigation for manipulation of global benchmark interest rates and are being investigated for their operation of dark pools. They have also been named in the lawsuit by U.S. military veterans and their families for their part in indirectly funding terrorist attacks.

What now? The bank is working on a turnaround plan, and is shrinking its investment bank and focusing on less risky and capital intensive businesses. As part of its restructuring, they are also exiting unprofitable businesses and as part of its push toward greater profitability, they have announced layoffs of up to an additional 19,000 employees over the next few years. Revenues in the last quarter grew by 9.1% and the forward P/E sits around 8.

With the ECB ready to bolster its stimulus efforts, is this a good time to buy low on Barlcays PLC (NYSE ticker BCS)?

We took their current 6 month price trend, to find similar historical instances of trading in Financial Services stocks to see how the market typically reacts to similar environments. We not only get historical comps, but by capturing actual return distributions historically we are able to form a range of return probabilities we’ve validated over 9 years of research.

Here’s the current 6 month price trend for Barclays:

The following chart displays the 3 month forward returns of the 95 most statistically similar instances of the current price trend in BCS in Financial Services stocks dating back to 1986.

The average return of the 95 most similar historical instances is 17.4% with 10 times the upside to downside. There’s 85% probability the price will be above $13.98 in 3 months, representing a good risk premium from its current price of $14.82.

Have a great week!