Talyor Wimpey (LSE: TW), Barratt Developments (LSE: BDEV) and Persimmon (LSE: PSN), the three largest listed housebuilders in the UK, have seen the value of their share soar as the housing market continues to flourish. Their shares are amongst the top performers in the index, having all risen by more than 40% over the past year.
A common mistake with investing is to sell shares simply because the shares have made new highs or if they have risen quickly over a short period of time. “Don’t cut your flowers to water your weeds”, is considered to be one of the most important rules of investing. Cutting losing trades is often preferable to taking profits.
Momentum effect
Shares that have done relatively well against the stock market index in the past 52 weeks typically continue to outperform the index in the following months. This phenomenon, which is known as the momentum effect, has been generally observed for over a century.
These three housebuilders are all among the top 5 performing shares in the FTSE 100, which suggests they have a strong likelihood of outperforming the index again in the coming months.
Fundamentals are looking good too, with the structural shortage of housing supply likely to keep property prices buoyant, even as completions for these firms accelerate. In addition, forward looking valuation multiples are attractive, and dividend payouts rising sharply.
Taylor Wimpey
Shares in Taylor Wimpey have been the FTSE 100’s top performer, having risen 63% over the past year. With a forward P/E of 12.5, and a prospective dividend yield of 5.0% (including expectations of a repeat of last year’s special dividend), Taylor Wimpey is still attractive.
However, the cyclical pattern of profitability for housebuilders should mean that their shares would continue to trade at lower earnings multiples than the market. Management’s decision to pay special dividends as opposed to regular dividends reflects uncertainty relating to its cash flows over the long term.
With operating margins steadily rising to its 20% medium term target and a growing order book, earnings are set to continue to grow in the medium term, albeit at a more modest rate. Profitability for Taylor Wimpey does not appear to nearing its peak, so nor should its share price.
Barratt Developments
Barratt Developments has a forward P/E of 13.5, and a prospective dividend yield of 3.9%, which may make the housebuilder seem relatively less attractive. But, its order book and completions seem to be accelerating at a faster rate.
From its most recent trading update in May, forward sales were 17.9% higher than last year, and housing completions were expected to be around 16,100, 8.5% higher than last year. However, its smaller focus on the Southern England has meant its operating margins have historically been much lower.
Persimmon
Persimmon’s relatively stronger operating margins highlights the strength of its management. Operating margins in 2014 were 18.4%, higher than many of its peers, as it benefits from relatively lower land costs and lower development costs. Its plot cost to revenue ratio was just 17.1% in 2014, having declined steadily from over 20% in 2011.
Persimmon trades a forward P/E of 13.1, and has a prospective dividend yield of 5.2%.
