Down 30% last week! Should I grab this FTSE 100 stock while it’s cheap?

A sudden price drop can be an opportunity to invest in a stock at a low price but it involves risk. I’m considering the prospects of this FTSE 100 stock.

| More on:
Aerial view of York downtown at night

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investors often jump at any chance to buy FTSE 100 shares at a ‘discount’, especially during market downturns or when companies face temporary setbacks. I get it — who can say no to a bargain, right? Many of my own investment decisions have been influenced by price dips.

While this strategy can be profitable, it’s important to look beyond the price tag. Before diving into these opportunities, I carefully evaluate a company’s recovery potential. Merely buying cheap stocks can lead to significant losses if the underlying business is weak.

The UK property developer Vistry Group (LSE: VTY) caught my attention when it suddenly fell 30% last week. Property can be a risky industry so I’m checking if the stock is worth considering.

Strong foundations

Despite some volatility, the UK housing market has generally shown a steady demand for new homes. As a leading developer, Vistry stands to benefit from this underlying demand. The company’s portfolio includes various housing types, from affordable homes to luxury properties, which can help mitigate risks associated with specific market segments.

Moreover, its substantial land bank provides a solid foundation for future growth, allowing it to potentially capitalize on rising land values. So why the price drop?

The company attributed overall building costs as the key contributor to a profit warning announced last week. On Tuesday, 8 October, it was revealed that the total cost to complete nine developments had been understated by 10%. This could cost the company between £80m and £115m in profit.

More than £1bn was wiped from the stock’s value after the warning was announced. However, the shares have already begun a mild recovery, up 8% at the time of writing.

A challenging environment

The housing market is particularly sensitive to economic conditions. Factors such as interest rate changes, employment levels, and consumer confidence can significantly impact demand for new homes. Currently, supply chain issues are affecting the delivery of crucial building materials.

In addition to rising construction costs, Vistry faces intense competition from other major property developers in the UK, including Barratt Developments and Taylor Wimpey.

It must also overcome regulatory hurdles, planning permission delays, and environmental constraints. These can all increase costs and delay projects, potentially hurting the share price.

Financial position

Vistry has been actively involved in strategic initiatives, such as mergers and acquisitions, to expand its operations and strengthen its market position. To fully assess its financial health, I’ve considered three key financial ratios. Together, these ratios indicate the developer is efficient at generating profits and is sufficiently solvent, with decent financial leverage.

  • Return on equity: expected to be 10.3% in three years, it’s above the industry average of 7.8%
  • Net profit margins: at 6.9%, this percentage is up from 5.2% a year ago
  • Debt-to-equity ratio: with £3.34bn in equity and £645m in debt, this is a low 19%

In my opinion, it looks like a healthy company operating in a risky industry. The current dip is likely a once-off, caused by external factors pushing up costs. However, if these issues persist, profits could take another hit as operational costs increase.

Overall, I think it’s a good opportunity, so I plan to buy the stock this week.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark Hartley has positions in Taylor Wimpey Plc. The Motley Fool UK has recommended Barratt Redrow and Vistry Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Dividend Shares

How much passive income could I generate with just £10 per day?

Ken Hall wants to create his £10,000 yearly passive income dream by investing just £10 every weekday day in Footsie…

Read more »

Investing Articles

Is the Rolls-Royce share price too high? Here’s what the experts say

The Rolls-Royce share price has surged over two years, representing one of the FTSE 100’s greatest success stories. But is…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

A top S&P 500 growth share and an ETF I’d buy this November!

I think this S&P 500 share and exchange-traded fund (ETF) could be brilliant additions to my ISA or SIPP right…

Read more »

US Stock

Here are the best-performing S&P 500 stocks after the US election result

Jon Smith notes some of the largest gainers from the S&P 500 yesterday and explains how the election result has…

Read more »

Growth Shares

2 UK stocks knocking on the door of promotion to the FTSE 100

Jon Smith points out a couple of UK stocks that he feels could be ready for the big league based…

Read more »

Investing Articles

Rolls-Royce shares just fell 7%. Is it time to buy?

This investor in Rolls-Royce shares takes a look at the FTSE 100 engine maker's trading update to see what caused…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

What’s going on with the Auto Trader share price?

Paul Summers takes a closer look at why the Auto Trader share price has tumbled despite the company posting higher…

Read more »

Investing Articles

Legal & General shares look set to give me a mind-blowing 10.22% yield in 2026!

Harvey Jones is getting a brilliant second income from his Legal & General shares and expects even more to come.…

Read more »