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Why I think housebuilder shares look poised to outperform the market

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The chancellor’s announcement yesterday relaxing stamp duty on the purchase of houses is encouraging. Indeed, it could stimulate  property sales, as intended. And recent upbeat statements from some housebuilding companies are also welcome news and could help the sector outperform the market.

Taking these two indicators together, I’m bullish on prospects for stocks in the housebuilding sector and believe they could outperform the market.

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Trading better than the market expected

It’s no secret that the coronavirus crisis knocked down the share prices of the London-listed housebuilding companies. For example, at 2,558p, Persimmon (LSE: PSN) is still around 22% below its level in February, before the crisis struck the markets.

And other housebuilders’ stocks are even lower. Taylor Wimpey is about 38% down, Bellway is 40% lower, Redrow around 45% under its spring peak, and Vistry (LSE: VTY) has fallen by much as 50%. Of course, all these shares have bounced back somewhat from their coronavirus lows, but I reckon they could have much further to climb.

I think the market was behaving rationally when it marked down the housebuilders’ shares. When the Covid-19 pandemic emerged back in the spring, nobody knew what the future would look like. The national lockdown was unprecedented in our lifetimes, and there were many unknowns. The market priced in the collapse of trading, revenues and profits for the housebuilding companies. And, at the time, that assumption looked valid.

But the housebuilders have managed to keep on trading, in many cases. And recent statements have been upbeat. For example, today’s half-year trading update from Vistry covers the six months to 30 June. And the company said sales continued throughout lockdown and pricing remains “firm.”

During the period, the company’s employees returned to site working and the directors describe the first-half performance as “resilient.” Vistry even managed to reduce its net debt by around 25% to about £355m, which was “ahead of our expectations at the start of the pandemic.

A positive immediate outlook

Looking immediately ahead, chief executive Greg Fitzgerald said in the report there’s been an ongoing pick up in sales over the past eight weeks and the company has a “strong” forward order book. He also has “confidence” for the second half of the trading year.

Meanwhile, in a trading update from Persimmon today, chief executive Dave Jenkinson had good news as well. He said the company is entering the second half in a “strong position,” with work in progress “well advanced.” Indeed, forward sales are around 15% ahead year-on-year, and the company has a healthy-looking cash holding of about £830m.

I reckon it’s emerging that the short-term outlook for housebuilding companies is much better than feared by many when the coronavirus hit the economy. And the medium- and long-term outlooks look robust as well. We’re still suffering from a housing shortage in the UK, for example, and mortgage borrowing costs are still very low because of fallen interest rates.

Overall, I think housebuilding shares look like a good place to be right now and they could go on to outperform the market.

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Kevin Godbold owns shares in Vistry and Redrow. The Motley Fool UK has recommended Redrow. 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.

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