The housebuilding sector was hit harder than most by the shock 2016 EU referendum result, and investors have been treating it with suspicion ever since.
House of horrors
They fear that if Brexit goes badly wrong, this key domestic-focused sector will take a massive hit. Other concerns include the high cost of housing squeezing out young buyers, and the sector’s resulting dependence on the Government-backed Help to Buy scheme for new builds, although this has now been extended to 2023.
The result is that many house-builders have been trading at rock bottom valuations while offering outsize yields. For example, Barratt Developments was recently yielding 7.9%, while trading at just 7.7 times earnings. Taylor Wimpey has been yielding 13.1%.
Mortar to come
Two other builders, Bovis Homes Group (LSE: BVS) and Persimmon (LSE: PSN), have similarly low valuations and even higher yields. I have been bigging them up for months and sentiment now seems to be swinging in their favour.
FTSE 250-listed Bovis is up 14% over the last month, while FTSE 100 stalwart Persimmon is up 23%. Investors have been encouraged by a number of factors, including Bank of America Merrill Lynch upgrading the sector after saying risks are now priced in, while there’s a general feeling that the likelihood of a cliff-edge, no-deal Brexit is beginning to fade.
Now investors feel a little freer to look at their underlying attractions – high dividends, low valuations – rather than panicking about the macro threats out there. In a further boost, both Bovis and Persimmon posted robust sets of figures this week.
Bovis said full-year profits were slightly ahead of consensus with increased sales and improved margins, and lifted its final ordinary dividend 17% to 38p.
Persimmon’s recent trading update showed a 4% rise in total revenues and completions, although average selling prices rose just 1%. The housebuilder also reported continued customer demand helped by high employment levels and competitive mortgage rates.
Naturally, there are still risks and the biggest, of course, is Brexit. What happens next is anybody’s guess. But if we do crash out of the EU that could plunge housebuilders into extreme volatility. So bear that in mind, although this applies to many other investments, too.
Given the jump in both stocks in the past month, some may wonder if they’ve missed out on a buying opportunity. To a degree, the answer is yes. However, Bovis still trades at just 8.8 times forecast earnings, helped by a forecast 46% leap in earnings for 2018. It now offers a whopping forecast yield of 11%, followed by 10.7% and 10.9% over the next two respective years, which looks too good to resist if you expect a soft Brexit.
Similarly, Persimmon trades as a forecast P/E of 7.9 with a whopping forecast yield of 10.7% for each of the next three years. City analysts are forecasting a small drop in earnings over the next couple of years, so it isn’t all plain sailing. This aside, both stocks still look excellent value right now. Unless our politicians completely bungle Brexit. Surely they’re not that useless, are they?