Since 2 December, the FTSE 100 has climbed by 8.7%, and in the past 12 months we’ve seen a rise of nearly 30%. That’s remarkable, even considering the fallen value of the pound. But can it continue, and can you make big profits in 2017? I think you can.
Construction set to soar?
Construction and related services have been in a slump for the past two years, with the Brexit result giving the sector a further kicking just as it looked like we might be seeing the shoots of a recovery.
That’s made a lot of companies look very cheap to me, including Carillion (LSE: CLLN). The analysts are expecting three pretty flat years for earnings from the facilities management and construction services firm, but that does’t seem too bad to me. In fact, it would represent five years of stable earnings after a bit of a slump in 2012 and 2013.
The share price, which has collapsed to 236p today, gives us a forward P/E of around seven for this year, and that’s only about half the long-term FTSE average. That might be understandable for a struggling company, but Carillion is forecast to pay reasonably well covered dividends of around 8%.
There seems to be little or no Brexit risk here either, debt is low, and I see a strong upwards potential.
Support services bargain
Interserve (LSE: IRV) is another one that always looks puzzlingly cheap whenever I look at it, despite its moderate debt problems of 2016.
Interserve has been growing earnings steadily over the past few years, and though there’s a 7% drop expected for the year just ended, two years of modest forecast rises to follow give us a forward P/E of just five — and predicted dividends of around 7.5%, which would be more than 2.5 times covered by earnings.
The firm warned back in May that its debt was set to rise due to some exceptional costs. But this week’s year-end update told us that, at £270-£280m, debt is expected to be better than previously guided. We also heard that “…we are anticipating that strong international construction and equipment services results will broadly offset a disappointing performance in UK construction“.
I don’t see the dividend cut that many were fearing, and I see another potential 2017 winner here.
Insatiable demand for homes
The housebuilding sector was hit by the Brexit result, but that won’t stop housebuilders being strongly profitable — especially not with our severe housing shortage not going to end any time soon, not even if the hoped-for 200,000 new homes from the UK’s new wave of garden towns and villages comes to fruition.
My pick today is McCarthy & Stone (LSE: MCS), which builds retirement homes. An ageing population means there’ll surely be no shortage of demand.
On the fundamentals front, we’re looking at two strong years of earnings growth forecast, putting the 165p shares on a P/E for August 2017 of 10, dropping to only eight on 2018 predictions – and that’s low. Dividends should come in around 3% this year and 3.8% next, which is nicely progressive.
There’s no debt to worry about either. In fact, at the end of the firm’s first year as a publicly listed company in August 2016, there was a very nice pile of net cash on the books of £52.8m. The housebuilding sector looks attractive to me, and McCarthy & Stone looks like like a plum choice.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.