According to my latest research, the best interest rate you can get on a cash ISA is just 1.45%. Although you can get a higher rate if you’re willing to invest more and lock your money away for several years, if you only have a couple of hundred pounds and want to access your money whenever you feel like it, 1.45% is all you’re going to get.
With this being the case, I don’t think it makes much sense to invest in cash ISAs. Instead, I’m investing my money in blue-chip stocks like Barclays (LSE: BARC).
Unloved and undervalued
At first glance, Barclays doesn’t look particularly attractive as an investment. Over the past 12 months, shares in the bank have fallen by 24%, including dividends, underperforming the broader FTSE 100 by 16%. 2018 was one of the worst years in performance terms for Barclays’ share price since the financial crisis.
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Looking at this track record, you might think the bank ran into some serious problems last year, but that’s not the case. Figures for the first three months of 2018 showed a sharp improvement on 2017.
For example, third-quarter profit before tax increased 23% year-on-year and, for full-year 2018, City analysts have pencilled in earnings per share (EPS) of 22.3p, up 76% year-on-year. And as investors have been deserting the company, analysts have been increasing their earnings expectations. EPS forecasts for 2018 are 10% higher today than they were at the beginning of 2018.
Based on these numbers, shares in the bank are trading at a forward P/E of just 6.4. That’s not all. The last reported book value per share was 260p, so at the current price of around 151p, the stock is trading at a price-to-book ratio of just under 0.6.
Margin of safety
What I like about Barclays is the fact that this stock is clearly undervalued — as the numbers above show.
Usually, when a stock is trading at such a deeply discounted valuation, there’s a problem with the business, or growth is non-existent. As I have explained above, this isn’t the case with Barclays. The company’s set to report impressive earnings growth for 2019 and is extremely well capitalised. It reported a tier 1 capital ratio of 13.2% at the end of the third quarter of 2018.
So, why are investors selling the shares? It seems to me it’s a combination of Brexit worries and general ambivalence towards the banking sector. Virtually all UK-focused shares are being sold off at the moment as international investors fret about Brexit. This is something Barclays can’t do much about.
What the bank and its management can do is keep a steady hand on the wheel and push forward. As profits continue to grow, it should only be a matter of time before the rest of the market realises the value on offer here.
While you wait, the shares support a dividend yield of 4.3%, and the payout is covered 3.4 times by EPS, which leaves plenty of room for further growth.
