With a shift in power comes a shift in policy, and the stock market reacts accordingly. With the UK now under the leadership of the Labour government, I’m weighing up which are the best stocks to buy.
Labour wants to fast-track the building of affordable housing, which is likely to benefit home building and construction companies like Vistry (LSE: VTY) and Balfour Beatty. And a pledge to increase healthcare appointments and recruit more staff could benefit a real estate investment trust (REIT) like Primary Health Properties.
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Public infrastructure is another key sector that has historically benefitted from a Labour government, so companies like Kier Group and Serco (LSE: SRP) should do well.
But there may be more factors at play. I decided to take a closer look at two of these stocks to see if the new policies are enough to make a difference.
Vistry
Following the election result, Vistry CEO Greg Fitzgerald spoke enthusiastically of the company’s aim to support Labour’s affordable housing goals. The government has reinstated the mandatory housebuilding targets that the Tories scrapped, with a target to build 1.5m new homes in the next five years.
Not that Vistry needs the boost. The share price is already up 92% in the past year. In its latest results posted in April, revenue increased 29% and net income was up 9.3%. However, higher expenses meant profit margins fell 7.4% and earnings per share (EPS) missed analyst estimates by 20%.
But can the shares keep growing? With a price-to-earnings (P/E) ratio of 20.1, they look a bit overbought to me. Even with strong earnings, I wouldn’t expect much more price growth. The Taylor Wimpey price, by comparison, is only 15.9 times earnings AND it sports a 6.1% dividend yield. So while Vistry looks promising, investors may want to consider Taylor Wimpey instead.
Serco
Serco is one of the largest public service providers in the UK. From resourcing and security to energy and reforestation, it has its fingers in many pies. It’s had a good year so far, with the share price up 15%. But it still has a long way to go to recover the massive losses it suffered in the mid-2010s. An overcharging scandal and controversy around a migrant detention centre in Australia wiped 80% off the price between 2013 and 2015.
But with earnings growing at a rate of 22% and debt down 30% in the past year, things are looking up. Last year, Serco was awarded a contract to manage the UK’s air defence radars and more recently, renewed two contracts with the European Laboratory for Particle Physics (CERN), valued at £22.3m. It also turned down a buyout offer from US firm American Industrial Partners.
Despite its chequered past, it appears to be going from strength to strength. Still, it faces stiff competition from the likes of G4S, Babcock and Mitie Group. Its profits rest on securing government contracts, so any misses there could hurt the share price. All things considered, it looks like a steady gainer so I will hold my shares for now.
