Property developer Persimmon (LSE: PSN) has seen its stock dive 62% in value since the Covid pandemic.
That’s a huge drop. And it could mean a rare chance for me to pick up cheap shares in the UK’s second-largest housebuilder.
It’s been over a decade since the last time the stock dropped like that. Then, in 2008, Persimmon stock crashed 84% in value due to the global financial crisis.
But that battered share price wasn’t a true reflection of its value. If I had bought some shares then, I would’ve made 400% on my investment in five years. Those shares would’ve gone up over 12 times in value by 2021.
Now, in 2023, the signs are that shares in Persimmon could offer me a similar wealth-building opportunity.
Another 2008?
Aside from Persimmon stock losing value, a strong similarity to 2008 is that house prices have gone down. In the UK, they went down for five months in a row up to January 2023, according to Nationwide.
An even stronger sign is the interest rates set by the Bank of England. Rates of 4.25% are now nearly as high as the 2008 rates of 4.5%.
This is bad news for housebuilders, because it makes mortgages cost more so fewer people will buy their houses.
A further problem is that the UK’s cost-of-living crisis and a predicted 2023 or 2024 recession mean people will have even less money for house deposits and mortgages.
All this doom and gloom makes me think that Persimmon will struggle for a while. But just like in 2008, this might mean a great chance for a bargain stock that could explode in the future.
The good and bad
The key point here, I think, is evidence that Persimmon can withstand these short-term pains, and then take advantage in the long run.
With no debt, £4bn in assets, and regular free cash flow of £700m-£800m, the York-based firm has the financial muscle to handle a tough year or two
And if I look further ahead, the UK’s seemingly chronic housing shortage is a long-term tailwind. I can’t imagine any housebuilder in this country struggling to find people who want to buy homes.
It’s not all good news, though. Rishi Sunak’s withdrawal of house-buying support schemes like Help To Buy might lead to fewer customers.
Likewise, I believe there are question marks over the build quality of the firm’s houses. I’ve even heard Persimmon called ‘the Ryanair of housing’. A worsening reputation could impact earnings in the future.
With both good and bad here, I don’t think it’s obvious whether to expect a repeat of the kind of incredible share price growth the stock enjoyed after 2008.
Am I buying?
All things considered, it does feel like now could be a great time to buy in. The reason? It feels like we’re close to maximum pessimism with housebuilders.
Per Warren Buffett’s famous quote, “It’s best to be greedy when others are fearful.”
As such, I will consider opening a position in Persimmon the next time I have free cash available. Perhaps one day I will think the move as good as if I’d bought in during 2008.
