Many investors want to buy shares cheaply and then hold them to sell them at a higher price. Sounds simple, doesn’t it? But in reality it’s often much harder to achieve. However, I think shares in Barratt Developments (LSE: BDEV) may be too cheap to ignore and could offer a big upside for any investor willing to pick up the shares now.
Not that I recommend anyone buys with the aim of making a fast buck. We take a long-term view here at The Motley Fool so anyone buying should think in terms of years, not weeks or months.
A very cheap share price
The shares are trading on a P/E of seven and are therefore very cheap. It’s broadly the same across the housebuilding sector though. I think this is primarily because of fears around the end of government support such as Help to Buy and wider concerns about the economy.
This environment creates an opportunity to invest in most of the housebuilders, of course. But I like Barratt Developments because it has around £430m in cash. It also has access to £700m undrawn credit.
If we look back to how it was performing pre-Covid-19 there are a lot of reasons for optimism if the lockdown continues to be eased. Revenues were rising and the group was making progress on pushing up its margins.
Barratt had also taken steps to reduce its exposure to the struggling central London property market. Long term, this seems like a sensible move.
Looking at the subdued share price and valuation metrics, such as the P/E ratio, it’s hard not to see Barratt Developments as anything other than an undervalued share with a lot of potential to rise.
A rival with a new boss coming
Rival housebuilder Persimmon (LSE: PSN) will be getting a new boss who’ll start at the end of this year. Dean Finch will be joining Persimmon from National Express.
It will be interesting to see what his strategy will be. I imagine he’ll continue the work of interim boss David Jenkinson who began the process of improving the culture and build quality at Persimmon following the controversial reign of Jeff Fairburn.
This strategy did hit overall volumes. Before Covid-19, the group was selling about 4% fewer homes, but for the long term, rebuilding customer trust is essential. The group has cash and a strong land bank so has many reasons for optimism. I think that’s why the shares are more expensive than BDEV on around 2.8x book value. That figure is well above the average for the sector and certainly not such an obviously cheap share price as BDEV. Yet I still see its price as attractive.
I’ve been invested in the shares for a number of years and while housebuilding is cyclical, I think they offer value qualities. Meanwhile market forces support the housebuilders in general. Those forces are the imbalance between supply and demand for housing in the UK.
Lastly, with construction one of the first sectors to be freed from lockdown restrictions, housebuilders have had a head start compared to other industries in recovering from the coronavirus crisis. I’m optimistic the share prices are too cheap to ignore. I’m especially upbeat about Barratt Developments.
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.