Every stock market transaction involves two people with opposing views. The buyer thinks the shares they’re purchasing are likely to increase in value. But the seller thinks their money can be used better elsewhere.
Today, I’m going to look at two FTSE 250 stocks I think are too risky to buy at the moment.
Storm clouds gathering
The UK housing market always divides opinion. But some problems, such as affordability, seem real enough to me. The average house price in England and Wales was 7.8 times the average income in 2017, according to government statistics.
For new-build homes only, this average house price was 9.7 times average earnings in 2017.
It’s no wonder that house-builders are keen to encourage politicians to extend the Help to Buy scheme beyond its planned 2020 end date. Without these cheap government loans, new house prices might start to fall.
Great results again
Today’s full-year results from Bellway (LSE: BWY) show how dependent the company is on Help to Buy. During the year to 31 July, 39% of the group’s completions used the scheme, up from 35% during the previous year.
Sales during this period rose by 15.6% to £2,957.7m, while operating profit was 14.2% higher, at £652.9m. Although the group’s operating profit margin fell by 0.2% to 22.1%, this remains a very impressive figure.
However, net cash was a relatively modest £99m at the end of July. Because of this, this house-builder’s dividends are less generous than those of some rivals. This year’s will rise by 17.2% to 143p, giving a dividend yield of 5%.
Buy, sell or hold?
Bellway stock trades on 6.3 times 2019 forecast earnings. It could be cheap. But the shares also trade at 1.5 times their book value, and the dividend yield of 5% isn’t especially high. These ratios suggest to me that the stock is already fully priced.
I think the risks are greater than the potential rewards. I wouldn’t buy Bellway at this level.
Woodford has been selling this stock
When I last wrote about home repair service provider Homeserve (LSE: HSV) in November 2017, I was cautious about the outlook for growth. The shares are now worth about 10% more than they were then, so my caution may have been premature.
However, I was interested to note that fund manager Neil Woodford has been selling his funds’ stakes in this firm. On 12 October, Woodford’s funds reduced their holding in Homeserve from 7.52% to under 5% — the minimum level where disclosure is required.
This means that he may have sold all of his Homeserve shares. We don’t yet know.
Why I’d sell too
What I do know is that Homeserve shares look expensive to me. Although this business boasts an attractive 15% operating margin and manageable levels of debt, I’m not comfortable with the valuation.
The stock currently trades on 24 times 2018/19 forecast earnings, with a dividend yield of just 2.4%. In my view, this valuation leaves no room for disappointment if earnings growth slows.
A second risk is that if interest rates continue to rise, investors may want higher dividend yields. I’d be more interested in Homeserve if the stock yielded 3%. That would require the shares to fall to about 700p — around 22% below today’s level.
Like Bellway, Homeserve just isn’t cheap enough to attract my cash.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Homeserve. 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.