Persimmon (LSE:PSN) shares have taken a big hit recently. Over one year, they’re down nearly 40% and right now, they’re close to 52-week lows.
Could the shares provide decent returns from here given their big drop? Let’s discuss.
Getting the timing right
When it comes to investing in housebuilder stocks, it’s all about timing.
Bought at the right time (near the bottom of the housing market cycle), these stocks can be amazing investments.
Bought at the wrong time, however, and they can be terrible investments.
Just ask anyone who bought Persimmon shares a year ago (when they were already 50% off their highs).
Are we near the bottom?
So, the question is – are we near the bottom of the housing market cycle right now?
That’s hard to answer. There are certainly reasons to be optimistic that we’re close to the bottom.
For example, earlier in the month, Persimmon said that it expects its annual profit for 2023 to be in line with expectations. In other words, it didn’t issue a profit warning. This is encouraging.
And City analysts expect the company’s revenues (which are expected to fall 38% this year) to stabilise in 2024.
However, there are also some indicators that there could be further pain ahead.
For example, earlier this week, rival Crest Nicholson lowered its annual profit guidance on the back of challenging trading conditions.
Meanwhile, Rightmove said that housing prices across the UK fell sharply last month as high mortgage rates drove home buyers away.
Additionally, high UK wage growth for the three months to the end of June has stoked fears that the Bank of England could raise interest rates in the months ahead. This could further hammer the housing market.
So, there’s a fair bit of uncertainty here right now.
Big dividends
Now, there could be some big dividends on offer for investors. Currently, analysts expect Persimmon to pay out 61.2p per share for 2023.
That equates to a yield of around 6.2% at today’s share price, which is no doubt attractive.
But there’s no guarantee that the company will pay this level of dividend (forecasts can be way off the mark at times).
And gains from dividend income could be wiped out if there was another drop in the share price.
It’s worth pointing out that just because the Persimmon share price is down 70% from its highs doesn’t mean that a bounce is on the cards in the near term.
A stock that’s 70% from its highs can still lose another 20%, 30%, 50%, or more.
Safer stocks to buy?
Putting this all together, my view is that investors need to be careful with Persimmon.
Yes, the stock is down a long way from its highs. But there’s still a lot of uncertainty.
While the outlook for the housing industry is so murky, I think there are better/safer stocks to buy.
