I keep looking at the shares that have slumped badly in the 2020 stock market crash. Taylor Wimpey (LSE: TW) looks obviously too cheap to me. The Taylor Wimpey share price is down almost 40% since the start of the year. It did pick up after the first couple of months of the pandemic. But since June, it’s been sliding back down again.
The reason is perhaps not surprising. The lockdown hit a lot of companies badly, but very few industries were almost completely halted. People can change their shopping habits to cope with social distancing, but they can’t really switch over to moving house online.
Taylor Wimpey share price recovery?
I’m looking for the best recovery bargains, and the key thing is not how far the Taylor Wimpey share price has fallen. And how well the company is likely to do in 2020 is also not a big priority. No, there are two things that really matter to me. One is what the demand for a company’s business is going to look like in the long term. On that count, we already have evidence of pent-up housing demand.
According to the Bank of England, mortgage approvals rose sharply in August. At 84,700, the figure is higher than it’s been since October 2007. And the £3.1bn borrowed by house seekers during the month was nicely ahead of July’s figure of £2.9bn. That’s well above expectations.
Long-term housing market
It will have been helped a little by the temporary easing of stamp duty. But we really don’t know how long the boom will last. Most commentators are expecting a weaker housing market over the next 12 months. Yet underlying it all we have the UK’s chronic housing shortage. And that surely still has the potential to boost the Taylor Wimpey share price for the long term.
Strong future demand is no good if a company doesn’t survive its short-term crisis to benefit from it, however. And that brings me to the second of my key recovery criteria. I’m talking balance sheet now. Taylor Wimpey raised approximately £522m from a share placing in June. And at interim time it was able to report net cash of £497m. There’s been some dilution there, but for a company with a market capitalisation in excess of £4bn, it’s not a lot. And it really does provide a healthy financial position.
Super low valuation
Bearish investors will presumably be looking at the Taylor Wimpey share price valuation. And I suspect they’ll be thinking it’s a little high right now, in the light of the earnings slump forecast for the current year. But that should reverse in 2021.
The pressure looks set to carry on over. And analysts have an EPS pencilled in that’s around 40% down on 2019. But it still puts the shares on a 2021 P/E of only nine. And if the firm gets back to full earnings potential after that, we’d see that multiple drop to only a little over five.
I think a return to dividend growth could be what kicks off an upwards re-rating for the Taylor Wimpey share price. And over the next 12 months, I reckon it stands a chance of becoming the FTSE 100’s top performer. Unless it’s beaten by Barratt Developments.
Alan Oscroft has no position in any of the shares mentioned. 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.