I think buy-and-hold is a good strategy for index funds, like a FTSE 100 tracker, and individual high-quality stocks in more defensive sectors (such as consumer goods). However, I believe a ‘value’ strategy of buy low and sell high has more going for it when it comes to the most highly cyclical sectors (such as housebuilders).
With this in mind, I reckon the market is currently offering canny investors a second chance to sell and bank profits on Footsie builders Barratt Developments (LSE: BDEV), Persimmon (LSE: PSN) and Taylor Wimpey (LSE: TW).
The most popular markers of value — low price-to-earnings (P/E) ratio and high dividend yield — can lead investors in housebuilders astray. As you can see in the table below, attractive P/Es, yields, margins and profits are a siren call luring investors in at the top of the housing cycle. However, a less frequently used valuation metric flashes a big red warning signal: price-to-tangible net asset value (P/TNAV).
|
|
Housing cycle top |
Housing cycle bottom |
|
P/E |
Low/undemanding |
High/negative |
|
Dividend yield |
High/attractive |
Payouts suspended/rebased |
|
P/TNAV |
High (shares at premium to TNAV) |
Low (shares at discount to TNAV) |
|
Operating margin |
High teens/20s % |
Low (or negative) |
|
Profit |
High (record £££s) |
Low (or negative) |
I first suggested cashing in profits on housebuilders 18 months ago. In an article on Persimmon, I noted that at its then share price of 2,800p, its P/TNAV was at an unprecedented high.
Its shares, along with those of its peers, fell heavily through 2018. However, they’ve rallied this year on further record profits, and while they’re not back to previous levels, current valuations, in the table below, are screaming ‘sell’ to me.
|
|
Barratt |
Persimmon |
Taylor Wimpey |
|
Reference share price |
594p |
2,188p |
181p |
|
P/E |
8.2x |
7.7x |
8.5x |
|
Dividend yield |
7.5% |
10.7% |
9.4% |
|
P/TNAV |
1.65x |
2.32x |
1.84x |
|
Operating margin |
19.2% |
29.2% |
21.6% |
All three builders have issued recent trading updates. All note a positive backdrop for the industry, summed up by Barratt: “The housing market fundamentals remain attractive, with a long term undersupply of new homes, strong government support … and a positive lending environment,”— Persimmon also highlighting “high levels of employment.”
Help to Buy has been a particular boon for housebuilders (“a special kind of quantitative easing just for them,” as Merryn Somerset Webb wrote in an acerbic article on the subject in the Financial Times), but the industry has just about everything in its favour right now. When things are this good, there’s only one way they can go.
Builders will have to survive on a somewhat reduced supply of the crack-cocaine of Help to Buy from 2021, before going cold turkey in 2023. However, we could see other demand-sapping things, such as rising interest rates or lower mortgage availability, before then.
Meanwhile, on the costs side, build cost inflation of 3%-4%, forecast by the companies at the start of this year, isn’t helpful. And, while Persimmon and Barratt reiterated guidance in recent trading statements, Taylor Wimpey said: “[We] now expect build cost inflation for 2019 to be c. 5%.” It also said — and something of a concern with any company — meeting overall expectations for the year is dependent on results “weighted towards the second half.”
In summary, with all the demand stimuli for housebuilders currently at max, I see all the risk being to the downside. And with their P/TNAVs flashing red, I’d be inclined to sell and book profits on Barratt, Persimmon and Taylor Wimpey.
