If the housebuilders are set for recovery, this small cap could motor.
A number of investors have been looking at housebuilders of late. I think I know where the best value lies.
But first, let's have look at what others think. Last month, David Kuo explained why he is optimistic about the housebuilding sector in general.
David was briefly interviewed about a few he liked, concluding that Persimmon (LSE: PSN) was best of the bunch due to its confidence in laying out its future dividend policy over the next nine years. At 631.5p per share, the brokers expect next year's yield to be around 7.6%; the best of the housebuilder income streams.
Persimmon was a share previously identified by Stephen Bland for his value portfolio, which was sold in February for a very impressive 53% capital gain.
Of the seven big players in the market, my preference is for Bellway (LSE: BWY) due to its negligible gearing and discount to book value.
But if it's book value alone you're interested in, then Barratt Developments (LSE: BDEV) has one of the lowest price-to-book values in the FTSE 250.
Meanwhile, Redrow (LSE: RDW) was already at a 17% discount to book value before it recently raised gross proceeds of close to £80m to focus further on the London residential market.
Best of the best
But the best of the best for me is Gleeson (LSE: GLE), which specialises in urban housing regeneration and strategic land trading, the former mainly in the north of England, the latter in the south. Its developments are at the cheaper end of the scale.
Gleeson was one of the main holdings in the portfolio of a private investor featured last week. Investors may understandably perceive it to be inherently more risky than the five big guns listed above due to its sheer lack of size. It's just 15% the size of the smallest, Redrow, with a market cap of £60.5m at 114.8p.
The shares have rallied a little this week after a favourable trading announcement. An increase in building sites from 11 to 28 is a sign of expansion and the order book is up to £10.8m. There's also 26p per share in cash, and NTAV of over 180p per share.
But the expansion of the landbank is the biggest clue to future success. Over the last year, Gleeson disposed of five sites representing 115 acres, but bought five new sites comprising 228 acres. New land bought at depressed prices should help both profitability and NAV in the years to come. I expect to see the shares gradually close the gap to NAV -- a NAV which I think will also gradually rise.
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> David owns shares in Gleeson.
