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Dirt-cheap UK shares I’d buy ahead of the stock market recovery

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I believe as the UK economy comes out of lockdown, we’ll see a stock market recovery as well. As such, I’m looking for dirt-cheap UK shares to buy to capitalise on this recovery. Of course, this is just my opinion, and there’s no guarantee we’ll see either an economic or a stock market recovery over the next few weeks and months. 

Dirt-cheap UK shares

One sector where I believe there’s plenty of value to be found right now is the UK homebuilding sector. With that in mind, I’d buy housebuilders Barratt Developments (LSE: BDEV), Persimmon (LSE: PSN) and Taylor Wimpey (LSE: TW) for my portfolio to capitalise on the stock market recovery.

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The UK housing market is structurally undersupplied. This is driving up home prices, and it’s unlikely to change anytime soon. Despite government policies to encourage homebuilding, strict planning regulations and population growth are two headwinds preventing builders from meeting rising demand. As well as these factors, government initiatives such as the Help to Buy scheme and low-interest rates have helped push prices higher. 

However, past performance should never be used as a guide to future potential. So, while home prices have risen almost continually for the past few decades, there’s no guarantee this trend will continue indefinitely. Despite the factors outlined above, a sudden financial crisis or boom in house construction could send the market lower. 

Stock market recovery 

I think Barratt, Persimmon and Taylor Wimpey are all well-placed to navigate these risks. All three also concentrate on the lower end of the housing market where demand is greatest.

For example, in 2020, Taylor’s average selling price was £288k, Persimmon’s was £230k and Barratt’s was £284k. This end of the market has been much more resilient throughout the economic cycle in the past than higher-end properties. That said, this hasn’t been the case over the past 12 months. Research shows properties costing more than £1m outperformed the rest of the market in 2020. This illustrates both the risks and opportunities these businesses face.  

Despite these challenges, government forecasts suggest the UK will need at least 300,000 new homes every year. As some of the largest housebuilders in the country, I think Barratt, Persimmon and Taylor Wimpey will benefit from this demand. 

Also, they’ve all shown a willingness to distribute large amounts of cash to investors when times are good. City analysts have pencilled in dividend yields of 3.7%, 9% and 5% respectively in 2021. These projections look attractive compared to the current interest rate environment.

Nevertheless, they’re only projections at this point. There’s no guarantee any of the three companies will meet these targets. If the economy deteriorates further, they may even skip dividend payments altogether.

Overall, despite the risks they face, I’d buy shares in Barratt, Persimmon and Taylor Wimpey as a way to capitalise on a potential stock market recovery over the next few months.

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Rupert Hargreaves 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.