The worst performing FTSE 100 share over the past year is down by a whopping 40%. But has it finally reached bargain territory? Let’s find out.
This poor performer is one of the UK’s leading housebuilders, Persimmon (LSE:PSN). Given the steep rise in borrowing costs this year, it’s not too much of a surprise to see it sinking.
But it’s certainly a sharp contrast to previous years. From 2010 to 2020, it was one of the leading stocks in the FTSE 100.
It benefited from ultra-low interest rates and government schemes such as Help to Buy. Rising property prices alongside tight cost control kept profits high.
Today, the Help to Buy scheme no longer exists and interest rates have moved sharply higher. With larger mortgage costs, new homes have become less affordable for many.
It certainly doesn’t sound like a lucrative environment for a UK housebuilder.
Priced in
But remember that the stock market is forward-looking. Current share prices try to anticipate what the environment might look like in six to nine months.
So could it be that housing market weakness is already priced into Persimmon’s depressed share price? It’s certainly possible, but impossible to know for certain.
One thing I do know is that these shares now look cheap to me. Barring this week, it has been over a decade since Persimmon shares traded at below £10. And they’re currently on a price-to-earnings ratio of just 11.
Combined with an 18% return on capital employed, a double-digit profit margin, and a 6% dividend yield, it has started to look interesting for this FTSE 100 share.
So much so that if I had spare allowance, I’d add some of these shares to my Stocks and Shares ISA today.
Uncertainty remains
Mortgage costs have soared to the highest level in 15 years. And in an attempt to squash rampant inflation, interest rates could rise further over the coming year.
Around 2.4 million fixed-rate mortgages are expected to expire between now and the end of 2024. With new mortgage costs much higher than before, it will likely impact housing affordability.
This could have a direct impact on the demand for Persimmon’s new homes.
So what might it take to propel the shares higher? Well, given how cheap the shares look, even the slightest bit of positive news in this sector could be enough.
Why I’d pick this stock
Fundamentally, it’s a solid business that I think should thrive in the next business cycle.
It’s worth noting that its average selling price for a new home is over 20% below the UK national average. This value proposition could even help Persimmon as household affordability tightens.
In contrast to the last big housing downturn, housebuilders have far more net cash. In fact, Persimmon has a rock-solid balance sheet. Not only does this offer security, but it also allows options to source future growth opportunities. By being able to buy cheap land, for instance.
Fundamentally, the long-term dynamics in the UK housing market remain strong. Despite current uncertainty, demand for new housing is likely to exceed supply for many years.
This bodes well for FTSE 100 housebuilders like Persimmon. I’d buy with some spare cash.
