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Why I think this big director buy highlights that this unloved FTSE 250 stock is now cheap

Housebuilders have had a torrid year to date. For years, the share prices of all the big listed firms were rising quickly. Government support had boosted demand and the builders profited. This year the wheels have come off in a major way. Crest Nicholson (LSE: CRST) has been no exception to the overall market fall and its shares have fallen by around 40%.

Under the hammer

With the shares under so much pressure and the industry out of favour with investors, os now the time for contrarian investors to take a look at some of the leading companies? Crest Nicholson is particularly appealing, I think. If you look at Persimmon in the year to date, its shares have fallen by 21%, whilst the share price of Barratt Developments has fallen by 25% over the same timeframe. Clearly then Crest Nicholson is being hit harder, which means more potential upside if conditions become more favourable to housebuilders.

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The chairman has shown his confidence in the stock. Often executive buys can be pretty meaningless, with highly paid executives only buying minimal amounts of stock compared to their pay. In the case of Crest Nicholson though, I think the director buy is a clearer indication that the company is looking undervalued.

Following a profit warning recently, the executive chairman bought over £450,000 worth of stock. I take confidence from this big investment in the company. In the 2017 annual report, his base salary was revealed to be £541,000, indicating it is quite a significant investment. It shows to an extent that he is confident in the business, although it’d be even better if other board level executives were to buy more stock. The chairman happens to be the executive with the largest shareholding – although he has been at Crest Nicholson since 1999 which goes some way towards explaining why that is the case. So what should investors think?

A stronger future

I din’t think we should be expecting a rapid turnaround. Crest Nicholson has just recently warned that full-year profits would be lower than expected. It also warned that margins would be below previous guidance. At the same time it said its CFO would be stepping down from the board and leaving the company after a short handover period.

Against this backdrop the shares, even with a P/E of around 5, still look risky. I do think the whole sector is looking a little vulnerable now, after years of supportive government policy. Rising interest rates, Brexit and a weak economic outlook are all putting downward pressure on housebuilders. The big jumps in the dividend that investors have been used to in recent years are being reined-in. October’s interim dividend was held at the same level as in 2017, the first time since 2014 it had not been increased. Clearly, there is a lot of risk for investors, it’ll take time for Crest Nicholson to get back on the right tracks, but it is now looking cheap to me. A further deterioration in the share price would present a major opportunity to purchase part of a good company at a great price. 

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Andy Ross owns shares in Persimmon. 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.