UK Edition
Rarely does this column tip a stock and advise its sale only six weeks later. But today we put our preference for long-term investing to one side to bank a 38pc profit on a share we rated a buy in late April.
That share is Barclays and the reason for its sale, apart from a very handsome return in such a short period, is that the stock has performed exactly as we hoped but perhaps more quickly than we expected.
Our point when we tipped Barclays was that, by sending its share price down to the same extent as Lloyds’ in response to the coronavirus crisis, the market had missed its key advantage over its rival: its investment bank.
While ordinary banking for individuals and businesses is under the cosh as each suffers from the lockdown, investment banking is enjoying a purple patch because so many firms are tapping investors for new funds in order to shore up their balance sheets while the pandemic stifles their business.
When companies ask investors for new money, they normally do so with the help of an investment bank. So the pain being endured by Barclays’ retail side is being offset to some degree by the hay being made at its investment banking arm.
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Lloyds, in common with almost all Barclays’ other European rivals, has no investment bank, but the two lenders’ shares had still fallen more or less in lockstep in the weeks before our tip.
We felt this reflected temporary blindness on the part of the market and tipped Barclays on the basis that before long, investors were bound to notice its key advantage over its rivals.
Well, they have. Since our tip, Barclays’ share price has risen by 38pc, while Lloyds’ has managed only 9pc. Stocks more broadly, as measured by the FTSE 100 index, have recovered by about 10pc over the same period.
So the strong outperformance we expected from Barclays on the basis of its investment banking advantage has already come to pass.
Of course, that outperformance, and indeed Barclays’ good run in absolute terms, could well continue but we are inclined to sell now. Partly this is because such a large gain in so short a period feels too good to ignore, but we do have misgivings about the longer-term prospects of all banks, Barclays included.
All lenders are likely to be hit by a rise in defaults in the coming recession. Their profitability also suffers when interest rates are extremely low. And the boom in investment banking revenues from companies that are having to raise new capital is unlikely to last long. Time to bag our profits. Sell.
Questor says: sell
Ticker: BARC
Share price at close: 119.5p
Update: Microsoft
There is no need to re-evaluate our case for holding Microsoft, set out here only in April. But readers may be struck, as this column was, by a recent prediction that its market value could before long exceed that of the entire FTSE 100. Microsoft is worth about $1.4 trillion (£1.1 trillion), the index a collective £1.5 trillion.
Researchers at ValuAnalysis, an investment consultancy, said: “The implication [of the comparison] was that it was insane for a company to be approaching the market value of a major country’s benchmark. We beg to differ.”
They highlighted what they called a “slow and relentless consolidation of [Microsoft’s] dominance in the corporate world” and said it was “exposed positively to the tectonic shifts that are shaking the corporate world, pre and even more so post-Covid”. Hold.
Update: AG Barr, Diageo, Rémy Cointreau
Another observation that caught Questor’s eye was this from Nick Train, manager of the Finsbury Growth & Income Trust, about business disruption brought about by Covid-19: “I always remember the anecdote told me by the chairman of AG Barr – that his predecessor had continued to advertise Irn-Bru throughout the Second World War, even though the ingredients weren’t available to actually produce the stuff.
"But the brand stayed fresh in consumers’ minds for when peace was restored. We’d say the same today not only to AG Barr, but all the brand-owning companies we hold.” These include Diageo and Rémy Cointreau, tipped here in the past. All three are holds.
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.