The FTSE 100 is littered with beaten-down stocks. The economic environment hasn’t been conducive to the bull run we’d all been hoping for. But these conditions are also ideal for value hunters.
In such an environment, I look to channel my inner Warren Buffett — the king of value investing. He tells us that bad news is an investor’s best friend, and that we should be greedy when others are fearful.
So, if we want to invest like the incredibly successful Buffett, maybe now is the time to be active.
Buying bad news
The ‘Oracle of Omaha’ tells us that we sometimes need to overlook bad news and focus on fundamentals.
So, with that in mind, I’m looking at one sector that’s been hammered by bad news over the last year — housebuilding. The news hasn’t been getting any better in recent weeks with interest rates continuing to rise. Forecasts now suggest a Bank of England interest rate of 5.4% by the end of the year.
Obviously these rate rises are designed to reduce the flow of money within the economy. In theory, this leads to less demand for mortgages and fewer buyers, and eventually falling house prices. Crippling mortgage repayments could also force more property onto the market.
Meanwhile, construction material prices rose by 11% last year. Clearly, this isn’t a great combo.
So, what does this mean for share prices? Well, we can see that Persimmon (LSE:PSN), for example, is trading near a 10-year low. Others are clearly depressed, but not to the same levels.
A buying opportunity?
Falling share prices don’t mean cheap stocks. Some stocks are cheap for a reason. As Buffett tells us, it’s about fundamentals and we have to do our research.
Focusing on Persimmon, the stock offered a huge 18% dividend yield in 2022. But it was unsustainable and the cut (now 5%) was made towards the end of the year. The company had also claimed to have one of the lowest exposures to the fire safety pledge. However, this turned out to be incorrect and Persimmon has quadrupled its cost forecast.
More recently, UBS upgraded Persimmon to ‘neutral’ from ‘sell’. The FTSE 100 homebuilder is buying cheap land again, as it did in the previous downturn, and is aiming for the top end of guidance.
While this is positive, it means Persimmon could be more exposed to negative pressure due to market positioning — it was a particular beneficiary from the now-closed Help to Buy scheme. UBS reiterated a ‘buy’ rating on a host of other housebuilders, meaning it sees better value elsewhere.
So, no. I’m passing on this opportunity to buy Persimmon stock.
A better alternative
Vistry Group (LSE:VTY) might not be trading at 10-year lows, but it’s not far off. The FTSE 250 company is exposed to the same concerns within the private market — although sales have picked up since the disastrous Truss premiership.
I’ve been buying Vistry shares, and its 7.8% yield, rather than Persimmon. And that’s because Vistry offers more safety in the form of its sizeable affordable housing division.
Earlier in the year, the firm said its affordable housing and rental sector work has partly cushioned it from the wider property slowdown. This could continue to work in its favour as interest rates increase and as private sales, potentially, fall.