Investors are quite right to be concerned about the impact of Brexit on homebuyer appetite looking ahead. Indeed, economists have been busy in recent weeks downgrading their growth forecasts for the UK economy for 2017, and this trend could continue beyond next year should EU withdrawal negotiations become long, confused and painful. Many investors share this cautious outlook, with fears of rising unemployment and falling wage levels prompting a huge switching-out of the housing sector.
Taylor Wimpey (LSE: TW) for one currently trades at a 25% discount to levels seen on the eve of the referendum. And this makes the stock the cheapest amongst its FTSE 100 (INDEXFTSE: UKX) peer group, based on current earnings and dividend estimates.
For 2016, an expected 15% earnings rise leaves the business dealing on a P/E rating of just 8.4 times. This is some way below the benchmark of 10 times that’s taken to be indicative of firms of high risk profiles.
And Taylor Wimpey is expected to pay a dividend of 11.2p per share this year, resulting in a gargantuan yield of 7.7%.
While tough economic conditions may cause some moderation in home price rises looking ahead, I still expect the likes of Taylor Wimpey to continue reporting handsome earnings growth. Britain’s homes shortage is not likely to disappear any time soon, not while lenders are likely to maintain their ultra-attractive lending policies to stop housebuyer demand falling off a cliff.
In short, I believe Taylor Wimpey and its peers are some of the most robust contrarian stock picks out there.
Big shop of horrors
I am less enthused by the earnings outlook over at J Sainsbury (LSE: SBRY), however, in the near-term and beyond.
Grocery industry researcher Kantar Worldpanel reported last week that the London chain’s sales slipped 0.4% during the 12 weeks to October 9, continuing the steady top-line deterioration as Aldi and Lidl continue to surge — sales at these outlets rose 11.4% and 8.4% respectively.
As well as having to contend with rising shopper demand for rock-bottom prices, Sainsbury’s is also no doubt quivering at the prospect of pressured margins as suppliers try to pass on the cost of adverse currency movements. The battle between Tesco and Unilever earlier this month marks the start of what is likely to prove a fresh, and potentially ugly, battle facing the UK’s supermarkets.
Such an environment makes investment in Sainsbury’s an extremely risky business, in my opinion, and I believe lack of obvious growth drivers — the firm is expected to punch a fourth consecutive earnings dip in the year to March 2017, this time by 10% — outweigh a conventionally-low P/E multiple of 11.8 times. This is some way below the FTSE 100 average of 15 times.
And I reckon this poor earnings outlook could also put projections of a 10.6p per share dividend, and with it a 4.4% yield, in significant jeopardy.
