Persimmon plc isn’t the only FTSE 100 stock I’d sell today

G A Chester discusses the valuation and prospects of Persimmon plc (LON:PSN) and another popular FTSE 100 (INDEXFTSE: UKX) stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Top FTSE 100 housebuilder Persimmon (LSE: PSN) released a trading update this morning in which it said it continued to experience healthy customer demand for new homes through the autumn sales season. It advised: “We anticipate our pre-tax profits for the year will be modestly ahead of market consensus.”

Despite this, and the company also reporting strong free cash generation for the year, the shares are down over 1% at 2,710p. There was little on the outlook for the current year beyond management saying it remains “mindful of market risks, including those associated with the uncertainty arising from the UK leaving the EU.” It added that it’ll update on its assessment of the housing market over the early weeks of 2018 in its results on 27 February.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Cyclical shift

Housebuilders’ profits and cash rewards for directors and shareholders have been pumped up by the steroids of low interest rates, the Help to Buy scheme and other favourable government policies. The stimulus is at a peak, as interest rates are now moving into a rising cycle.

City analysts are expecting Persimmon’s profit growth to moderate rapidly in 2018 to mid-singledigits. Erring on the side of generosity, I reckon we’re looking at a forward price-to-earnings (P/E) ratio of a bit above 10 and a price-to-earnings growth (PEG) ratio of two, which is well above the PEG fair value marker of one. With the stock also trading at a peak cycle price-to-book ratio of 3.1, I believe now could be an opportune time to sell.

Downward slide

In contrast to Persimmon’s spectacular profits growth of recent years, the earnings of J Sainsbury (LSE: SBRY) have been on a downward slide. And as the company’s policy is to return half its earnings to shareholders in dividends, investors have seen multi-year annual dividend cuts.

Following a 17.3p payout for its financial year ended March 2014, Sainsbury’s board slashed the dividend by 24% for fiscal 2015. This was followed by an 8% cut for 2016 and a 16% for fiscal 2017. According to the consensus analyst forecast on the company’s website, shareholders can brace themselves for a further 6% cut to 9.6p for the current financial year.

Unconvinced

Sainsbury’s abysmal record of falling profits and annual dividend cuts makes it understandable that it had to do something to fight back against changing shopping habits and the relentless rise of discount chains Aldi and Lidl.

However, I’m less convinced by the merits of its acquisition of Argos than by Tesco‘s takeover of food wholesaler Booker and Morrisons‘ development of a number of wholesale supply partnerships, including with Amazon and McColl’s. For one thing, I see greater execution risk for Sainsbury’s with integrating Argos. And, for another, its increased exposure to discretionary consumer spending is not really what I’m looking for in a defensive sector like food.

Sainsbury’s is forecast to return to earnings and dividend growth (of around 10%) in fiscal 2019. At a share price of 246p, the prospective P/E is 11.5 and the forecast yield is 4.2%. Due to falling consumer confidence on the back of Brexit, belt-tightening as inflation runs ahead of wage increases, the company’s increased exposure to discretionary consumer spending and execution risk of integrating Argos, I view the current valuation as distinctly unappealing. As such, I rate the stock a ‘sell’.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

G A Chester has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Booker. 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.

More on Investing Articles

man in shirt using computer and smiling while working in the office
Investing Articles

Is Scottish Mortgage Investment Trust now a bargain growth stock?

The Scottish Mortgage Investment Trust share price has plummeted nearly 50% from its 52-week high. Is this a great opportunity…

Read more »

A couple celebrating moving in to a new home
Investing Articles

2 key stock picks for reliable passive income

I’m looking at stocks that can deliver reliable passive income to complement my growth picks, and I think I’ve found…

Read more »

A Rolls-Royce employee works on an engine
Investing Articles

In penny stock territory, is the Rolls-Royce share price set to soar?

The Rolls-Royce share price has sunk recently, falling into penny stock territory. But with flying hours recovering, is it too…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Lloyds shares drop 20% in 4 months. Should I buy now?

Lloyds shares have lost a fifth of their value since peaking on 17 January this year. But after rebounding from…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

As the stock market recovery stalls, should I wait to buy?

Has the stock market recovery run out of steam? If so, what does that mean for our writer's portfolio? Here…

Read more »

Diagonal chain made of zeros and ones. Cryptocurrency and mining.
Investing Articles

At 55p, is the Argo Blockchain (LON:ARB) share price too cheap to miss?

With a low P/E ratio and strong financial results, could the Bitcoin miner be good value for money?

Read more »

macro shot of computer monitor with FTSE 100 stock market data in trading application
Investing Articles

Here are 2 recession-proof FTSE stocks!

In the face of current economic uncertainty and fears of a looming recession, this Fool identifies two recession-proof FTSE stocks.

Read more »

British Pennies on a Pound Note
Investing Articles

Here is 1 penny stock primed to benefit from the construction boom!

Jabran Khan delves deeper into a penny stock that he believes could benefit from the construction boom, and explains why…

Read more »