Macroeconomic issues and market volatility have thrown up opportunities to snap up some value stocks, in my opinion. Are housebuilding stocks among these or are their challenges too great?
Attractive valuations and passive income opportunities
Some of the biggest names on the FTSE include Persimmon, Taylor Wimpey, and Barratt Developments.
On paper, all three stocks look cheap to buy now as well as offering enticing passive income opportunities. This is based on their price-to-earnings ratios and dividend yields as I write.
Persimmon shares trade on a ratio of 10 and offer a dividend yield of 7.8%, while Taylor shares trade on a multiple of seven and yield 8.6%. Finally, Barratt’s ratio is currently at eight and the yield on offer is 8.7%.
For a bit of context, the FTSE 100 average price-to-earnings ratio is 14 and dividend yield is 3.8%.
Challenges to navigate
All three of these potential value stocks face challenges that could have a material impact on performance, investor returns, and their respective share prices.
First, soaring inflation has caused a spike in the cost of raw materials. When the cost of materials rises, so does the cost to these house builders to construct their homes, which in turn can impact the profit margins that underpin both investor returns and growth plans.
Next, rising interest rates have caused the housing market to wobble. Rising rates have made it much harder for existing mortgage holders like me to pay our mortgages. As for people looking to buy their first home or move home, it’s become much harder to obtain mortgages. This has caused the market to cool and sales to slow down significantly.
Plus, I’m wary that if performance does dip consistently, dividends could be cut or cancelled as they’re never guaranteed.
There’s no real end in sight at present either, which is where the uncertainty element comes in for me. Uncertainty when investing can sometimes be a red flag.
Value stocks or ones to avoid?
As well as the attractive valuations and investor returns on offer, there are positives to point out.
The main one for me is the fact that the demand for housing is outstripping supply in the UK. This severe housing shortage has led to the government getting involved and promising to help stimulate the sector and get new homes built as well as help younger people get on the property ladder.
With the current economic climate, this is probably something that will be addressed in the longer term. Nevertheless, it is good news for Persimmon, Taylor, and Barratt. In the long run, this could turn into boosted performance as well as shareholder returns.
Overall I’m inclined to think that despite current challenges and a murky outlook, housebuilders are indeed value stocks that I can’t ignore.
I’ve always viewed value investing as the opportunity to buy quality, larger, proven businesses at a good price. I believe that definition applies to these businesses, as well as other house builders out there.
I wouldn’t buy all these shares for my holdings, perhaps one or two stocks. I’ll be carrying out more detailed research as to which ones I prefer and when I next have some spare cash to invest, I’ll buy some shares. I’m expecting short-term volatility, but more importantly, long-term returns and growth from these stocks.
