The builder offers recovery potential and hefty asset backing.
Each day this week we're highlighting a share you may wish to consider for your ISA. Today we turn our attention to Barratt Developments, a housebuilder that offers recovery potential and hefty asset backing.
I think ISAs are great, and it's best to approach them with a long-term view, because that way you can take advantage of years, or even decades, of tax-free profits.
So for ISA shares, I'm not interested in the latest investment fads and fashions, because even if there is a booming sector at any time, it tends to be short lived. For my pick in this week's series, I'm going for that oft-quoted maxim 'buy low and sell high', which, sadly, a lot of private investors fail to do.
And the best way to 'buy low and sell high' is to invest in businesses that are out of fashion, and whose share prices have fallen. So I'm going for a housebuilder, specifically Barratt Developments (LSE: BDEV).
Why housing?
House prices have fallen and will probably stay depressed for a few years yet, and the 'buy to let' bubble is over, so you might think house building is a poor industry to make a profit from.
But you don't need high house prices to make money by building and selling property; all you need is to be able to sell houses for a decent profit over what it costs to build them. In fact, today's subdued housing market could be beneficial for builders, as one of their largest costs -- land -- is no longer be priced so highly.
Furthermore, the long-term future of houses should be safe -- they may be seen as less of an investment asset at the moment (which, in my opinion, is a good thing), and more like places to live. But long term, there will still be steady demand for new houses at all levels of the property ladder. So this is a sector that's making and selling a genuine must-have essential.
Why Barratt?
Barratt's share price took a serious hit in the depths of the downturn, falling from a peak of more than £8 in early 2007, to just 25p by mid-2008. And though today the price has recovered quite strongly over the past few months, I think there's still more to come over the next decade or so.
Forecasts for the year ending June 2012 suggest Barratt will enjoy a decent return to profit after a few hard years, and a resumption of dividends. The payout will most likely be small, but with debt massively reduced, the company's land stock built up while prices were lower, and prospects for the future looking a lot better, I'm convinced Barratt is surely on the first step on the road back to healthy dividend rewards.
Yet even with the positive progress, this share remains undervalued to me. You see, Barratt's acquired building land helps supports the group's total asset value, which stood at £2 billion or 209p per share at the end of 2011. With the share price at 138p, anyone buying today could in effect obtain £1 of assets for just 66p. That does not look a bad deal to me.
Indeed, mix that asset-discount on with forecasts of further profit growth during 2013, and I can only see the share price going up from here.
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