What: Shares in London estate agent, Foxtons (LSE: FOXT), easily outperformed the wider index during May. They delivered a share price gain of 28%, while the FTSE 100 could only manage a rise of 0.3% during the same period.
So What: The main reason for Foxtons’ exceptional share price growth in May was the result of the General Election. Prior to the election, Foxtons had reported a slowdown in demand for properties in London, which it blamed on the uncertainty being created by the possibility of another hung parliament. Furthermore, there were concerns surrounding the election of Ed Miliband as Prime Minister, with his mansion tax and apparent anti-business policies also causing investor demand in London property to be relatively subdued.
However, with the Conservative majority victory, investors appear to be of the view that it is ‘back to normal’ for Foxtons, with sentiment towards the company improving significantly in recent weeks. Of course, this only goes part of the way to correcting the nosedive in Foxtons’ share price that has occurred since it listed 2013, with it still being down 10% on its IPO level despite London property enjoying a boom period since then. As a result, it has been something of a mixed performer since listing less than two years ago.
Now What: While Foxtons’ share price is beginning to recover to its previous highs, it has largely been driven by improving sentiment. Now, investors need to see proof that Foxtons is able to deliver impressive growth numbers. And, looking ahead, its growth prospects are moderately impressive. For example, in the current year, Foxtons is forecast to increase its bottom line by 6%, followed by growth of 10% next year. Both of these figures compare relatively favourably to the wider market’s anticipated growth rate in the mid to high single digits over the next two years.
However, the challenge for investors is that, following the recent share price rise, Foxtons now looks somewhat fully valued. For example, it trades on a price to earnings (P/E) ratio of 19.4 (versus around 15.6 for the wider index) and, even with upbeat growth prospects, this still equates to a relatively unappealing price to earnings growth (PEG) ratio of 1.8.
As such, Foxtons could see its share price come under pressure over the medium term. That’s especially likely since the EU referendum debate is likely to cause considerable uncertainty over the next couple of years and could have a similar effect on demand for London property as the General Election did prior to May. Therefore, while Foxtons is a stock that is worth watching, now may not be the right time to add it to your portfolio, with there being a number of stocks with more obvious catalysts to push their share prices to higher highs.