Is the Barclays share price set to return to 350p?

The Barclays (LSE: BARC) share price recovered from the financial crisis to 350p as early as August 2009. However, it's never been back to that level since and is below 200p, as I'm writing. With City analysts forecasting earnings to jump 25% this year, followed by mid-teens growth in 2019, could a jaded stock market be hugely undervaluing the stock? Similarly, lighting specialist Dialight (LSE: DIA), which released its half-year results today, is trading at a level that doesn't appear to reflect its bright earnings outlook.

From recovery to growth

Dialight specialises in sustainable LED lighting for industrial applications -- an attractive growth market. When I wrote about the company in February last year, a transformation of its business model -- a key element of which was outsourcing manufacturing -- was progressing well. The shares were trading at 970p but my confidence in the outlook proved misplaced. The move to outsourcing manufacturing turned out to be not far short of disastrous and Dialight replaced its chief executive at the start of this year.

The company's shares are up 7% on Friday's close, but at 500p remain well below previous highs. New chief executive Marty Rapp has moved an increasing proportion of product assembly back in-house, reducing late orders significantly and also delivering an excellent cost performance. This and other strategic and operational changes appear promising to me and Mr Rapp told us: "We are now resuming a more aggressive approach to delivering growth, as we transition from recovery to growth."

Good margin of safety

Dialight is not out of the woods yet and there remains some risk. The company admits that its "extended operational difficulties have bruised our customer relationships and market share." However, Mr Rapp said: "We are confident that we can and will recover both."

City analysts are forecasting a 62% rise in earnings this year, followed by 41% next year. At the current share price, this gives a price-to-earnings (P/E) ratio of 17.2, falling to 12.2, and price-to-earnings growth (PEG) ratios of 0.28 and 0.3 -- well to the good value side of the PEG fair value marker of 1. As such, there appears to be a good margin of safety and I rate the stock a 'buy'.

Transformation

Back with Barclays, current chief executive Jes Staley has yet to be rewarded for his confident purchase of £6.5m worth of shares at 233p ahead of taking up his appointment in December 2015. With the shares currently trading at 193p, he's down over £1m at the moment.

As has been well-documented, historical misconduct issues have dogged the company. Only last week it was announced that the Serious Fraud Office (SFO) is seeking to reinstate charges relating to the bank's capital raisings of 2008, which were dismissed by the Crown Court in May. However, a line has largely been drawn under legacy issues, even if Barclays fails to get the SFO application dismissed by the High Court.

Meanwhile, Mr Staley has been reshaping the business into "a transatlantic consumer, corporate and investment bank, anchored in our two home markets of the UK and US, with global reach." This transformation is behind the strong forecast earnings growth I mentioned earlier. The current-year P/E is 9.6, falling to just 8.4 next year, and with PEG ratios of 0.4 and 0.6, Barclays could be the FTSE 100's best bargain. I see a return to 350p on the cards and rate the stock a 'buy'.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.

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