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Why I’d still buy and hold this stock after its 40% decline

Thanks to uncertainty surrounding our EU departure, shares in Bournemouth-based retirement housebuilder McCarthy & Stone (LSE: MCS) have remained stubbornly below the £2 mark for over a year now. With the exception of a couple of speculative (and therefore more volatile) mining stocks, the £884m cap remains one of the worst performing holdings in my portfolio. Is it a mistake to hang on?

I’m not so sure. McCarthy remains the largest operator in a niche market that should experience a significant increase in demand over the medium-to-long term as life expectancy continues to rise and more people downsize. Moreover, the business seems to be performing well enough based on today’s full-year trading update.

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While the number of completions over the last 12 months was similar to the previous year (2,302), the average selling price of each property rose by 3% (to £273,000), allowing revenue to increase 4% to a record level of £660m. As an indication of the demand, it saw a 21% increase in its order book at year-end to £141m. On the downside, full-year margins are still expected to be lower than in 2016 due to the increased use of incentives, despite a “strong recovery” in operating margin over H2.

Over the reporting period, the company opened 52 new sales outlets. It also developed a strategic partnership with property manager Places for People, allowing the former access to the rental market and new “untapped” locations. 

As far as its outlook is concerned, the firm stated that demand for its homes “remains strong” and that it is confident of delivering on its medium-term goal of building and selling 3,000 properties per annum. The expected “strong upward momentum” seen in average selling prices over H2 is encouraging and McCarthy thinks this is likely to continue into the next financial year.  

Share price aside, I’m fairly happy with the way things are going and will stick with the stock for now. The balance sheet is solid (£30m net cash despite ongoing investment) and the 3% yield — while unlikely to attract dividend hunters on its own — is hardly inadequate.

Another option

Of course, McCarthy & Stone won’t be to all investors’ tastes. Those disinclined to invest in small(er) companies could opt for Barratt Developments (LSE: BDEV) — the UK’s largest housebuilder — instead. 

Today’s annual results for the year to the end of June detailed “another year of strong performance“, according to the £6.2bn cap. Total completions hit 17,395 — its highest volume for nine years. Revenue climbed just under 10% to £4.65bn and pre-tax profit came in at £765m — a rise of 12%. Return on capital employed (ROCE) — often used to judge the quality of a business — continues to increase. At just under 30%, this is now roughly double what most would consider to be an acceptable figure.

Despite operating in a cyclical industry, Barratt also offers considerable appeal to income seekers with today’s corking 39% increase in the final dividend — from 12.3p per share to 17.1p — being accompanied by a 17.3p special dividend.

Although the recent slowdown in the housing market isn’t desirable, CEO David Thomas believes the company starts 2017/18 in a “good position“, with forward sales up almost 14% to £2.75bn. This, combined with Barratt’s solid balance sheet (net cash up 22% to £724m) and the “positive mortgage environment” should see the share price momentum experienced over the last year (+29%) continue for a while yet.

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Paul Summers owns shares in McCarthy & Stone. The Motley Fool UK has no position in any of the shares mentioned. 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.