Down 25%, are Barclays shares simply too cheap to ignore?

Barclays (LSE: BARC) shares have plunged 25% from their 52-week high of just a few weeks ago. It comes as the FTSE 100 is hovering around correction territory with a decline of about 10% over the same time.

So what should we do? While headline writers might love a good panic to attract a few eyeballs, Foolish investors should see dips like this in an entirely different light. For many, it might remind us what an opportunity we missed not buying Barclays shares back when they were truly dirt cheap.

Cheap as chips?

Some of us, no doubt, will see the price fall as giving us another chance. I mean, the forecast price-to-earnings (P/E) ratio for Barclays is down around seven again. That’s about half the long-term FTSE 100 average, and it seems low for a bank valuation.

What could go wrong?

No share is ever so cheap that we should just pile in without thinking it through properly. And there’s one question I think we really need to ask. Why have Barclays shares dropped further than other banks?

Lloyds Banking Group, for example, is down 19% at the time of writing from its high. That’s not exactly a win, but it’s a bit less painful. And the Lloyds forward P/E has held up better, at around 9.5.

It has to be Barclays’ exposure to international and corporate banking. Those sectors seem likely to suffer worse fallout from the Middle East conflict than Lloyds’ humble UK mortgage business. On the other hand, does that suggest greater profit potential for Barclays after the current strife ends? I think it might.

Global pain

But I think there’s a bigger worry than the short-term direct pain of current geopolitics. Over in the US, the Federal Reserve has kept interest rates on hold again. And there’s even talk of rates rising before the year is out.

Here in the UK, any potential cuts by the Bank of England have probably been shelved for some time.

I worry it might all point to what could be a new global slowdown, which could push economic recovery back a year or two. And that could quickly bring an end to the buoyant sentiment that’s boosted financial sector stocks over the past couple of years.

All in the price

Here’s the key question for me. Yes, risk has definitely risen for banking and other financial stocks. But is the danger fully reflected in today’s share prices? I think it might be. I reckon I see a reasonable bit of safety in the Barclays valuation for those considering buying now.

That doesn’t mean the share price won’t fall further. I see a significant chance that short-term fear could drive it still lower. I’m not going to buy Barclays shares now, but that’s only because I already have enough finance stocks. Diversification is especially important right now.

But I do think investors who are bullish on the long-term prospects for banks (and isn’t that all of us?) could do well to consider Barclays during this dip.

The post Down 25%, are Barclays shares simply too cheap to ignore? appeared first on The Motley Fool UK.

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Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.