When I first bought into housebuilder Persimmon (LSE: PSN), there were already clouds on the horizon. Higher interest rates, lower household spending, and an uncertain housing market were already weighing on the outlook for Persimmon shares.
Since then, things have gone from bad to worse. The firm’s business performance has declined and a recent trading update from rival Crest Nicholson underlined that there are challenges facing the housebuilding sector in general.
So, could it make sense at this point to cut my losses and sell my Persimmon shares?
More pain ahead
From one perspective, I think it could.
Losing money as an investor is never pleasant. But hanging onto shares that have fallen just because they are lower than the price one paid can be a costly mistake. The question in my mind always is not what I paid for the shares, but what I think they are worth.
As the Crest Nicholson statement showed, the housing market is facing significant challenges. Higher interest rates are putting some people off buying a house altogether, while an uncertain market outlook means others are delaying the move for the foreseeable future.
That leads me to fear that Persimmon shares could keep losing value.
Long-term outlook
That said, I am a believer in long-term investing.
Housebuilding is ultimately a cyclical business. When the housing market is strong, housebuilders do well. As sales slow and profits usually fall, their shares can fall a long way. But buying such shares cheaply at or near the bottom of a cycle can turn out to be a highly rewarding investment decision.
Are we near the bottom of a market cycle in housebuilding shares at the moment?
On the plus side, an ongoing shortage of housing ought to mean demand remains high. That could benefit builders like Persimmon.
But demand is only one part of the equation. Affordability also matters. In the context of housing, such affordability pertains to house prices but also access to mortgages. The past year has seen many potential buyers struggle to get financing for a home purchase. I think that could continue to be the case. On that basis, I do not think we are at the bottom of the housing cycle at the moment. On a worst case scenario, we could still have a long way to go.
Invest today for tomorrow
That could translate into further value destruction when it comes to my Persimmon shares.
But I knew when I bought them that housebuilding is a cyclical market. I do not think it is possible to time the market, so instead I assess my holdings on the basis of how I think they are currently valued relative to their long-term commercial prospects.
With regard to Persimmon, the company remains profitable, has a business model that has historically generated superb profit margins, and has a keen eye on cost control.
Over the long term, I think that could well add up to a recipe for success. Meanwhile, even after a substantial cut, Persimmon shares continue to offer a dividend yield of almost 5%.
For now, I have no plans to sell.
