The share prices of the major listed housebuilders have all been hit hard in 2018 after shareholders had for many years enjoyed bumper returns with demand fuelled by Help to Buy and other government schemes. The wheels have – at least for now – come off. Although as one of the most cyclical industries around, the share prices of housebuilders tend to be quite volatile and tend to suffer from sharper share price falls in a jumpy, declining market such as that we’re seeing now. It is against this backdrop that I’m wondering whether now may or may not be a good idea to think about adding shares in Barratt Developments (LSE: BDEV).
Avoid falling knives
Although it’s always tempting to try and second guess the market, it often leaves investors burned. This is what is meant by trying to catch a falling knife – catching a share that has fallen heavily in the hope it recovers quickly. The reality often is that shares that have been falling continue to fall and so it’s often smarter to be patient and reduce risk by buying low when the share price starts to recover and the market environment is more benign.
As the share price of Barratt is already down 32% in the year to date, it’s anyone’s guess in the short term where it might end up next. Crucially, the fall is roughly in line with that of some of the other major listed housebuilders. Persimmon (LSE: PSN) has seen its shares fall 31% in the year to date, while over the same timeframe Taylor Wimpey’s have flopped 37%.
While the political shenanigans around Brexit rumble on and cause business and consumer uncertainty it would be surprising, to say the least, if the share prices of the listed housebuilders bounce back any time soon.
When the time is right – act
All that being said, in time I expect the share prices of Barratt and its competitors will recover during 2019 and beyond. The reason is that housebuilding – although cyclical in nature – does have an imbalance in supply and demand, high margins for the builders, and profits, which in turn lead to very healthy dividend yields. Barratt yields around 6% now while FTSE 100 peer Persimmon yields well over 10%. These yields for brave investors can now be had at a cheaper price because the share prices have fallen so much. That means Barratt and Persimmon have P/E ratios of 6.8 and 7.3 respectively.
This is why I believe that when the market starts to recover and Brexit uncertainty passes, investors should be prepared to act. Barratt has increased its revenue, profit before tax, earnings per share, capital returned per share and year-end cash in every year since 2014. This shows it has sustainable growth and has a firm eye on investors’ interests.
Back in September, Barratt’s full-year results showed profit before tax up 9.2% to £835.5m and earnings per share rising 8.5% to 66.5p in the year to 30 June, meaning Brexit fears are not yet hitting the sector too hard. On top of that, the company revealed that it aims to build 3%-5% more houses over coming years and at higher margins in line with the rest of the sector. All of this bodes well for investors, showing the company is profitable despite the market slump.
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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.