Housebuilders Bellway (LSE: BWY) and Barratt Developments (LSE: BDEV) have been a spectacular investment over the last five years. Bellway stock has risen by 340% since 2010, while Barratt has managed a staggering 607%.
During the same period, shares in Tesco (LSE: TSCO) have fallen by 65%.
Shareholders in all three firms may be wondering what comes next. Can housebuilders continue to beat the market in 2016 – and will things keep on getting worse at Tesco?
Housebuilders = cash machine?
Contrarian investors like me may be tempted to take profits on housebuilders and invest in battered stocks like supermarkets. But selling a profitable investment too soon is often a costly mistake.
Housebuilders are currently reporting record profits and rising profit margins. These are funding strong dividend growth and providing support for share prices. Bellway’s dividend payout is expected to rise by 19% in 2016, while Barratt’s payout is expected to double to 30p per share, giving a prospective yield of nearly 5%.
Although housebuilders are starting to find that a shortage of skilled labour is limiting their expansion, I’m not sure that this is a bad thing. Demand appears to remain strong for new houses and if building capacity is limited, prices are likely to remain firm.
One cloud on the horizon is the risk that interest rates will rise.
Now that the US Federal Reserve has taken the first step, the Bank of England may follow. The base rate has been at 0.5% for so long that many homeowners have known nothing else. If mortgage rates do start to rise, house prices could weaken as homeowners try to limit their monthly payments.
However, I don’t expect interest rates to rise very far in 2016, if at all.
I suspect that investors in Bellway and Barratt may be wise to sit tight and continue collecting their dividends for a little longer yet.
Is Tesco an insider tip?
One man who might who might have an inside view on whether now is the right time to shift money from housebuilders into supermarkets is John Allan. Mr Allan is chairman of both Barratt Developments and Tesco.
Sadly we don’t know what his views are on each firm. What we do know is that he has been buying shares in Tesco. After several purchases in October and November, Mr Allan now owns 183,951 shares in Tesco, worth around £280,000.
He has also spent around £200,000 buying Tesco bonds and his total investment in the supermarket this year appears to be around £500,000. Although this isn’t necessarily a huge amount of money for a top FTSE 100 executive, I think it’s encouraging.
It’s also interesting to compare the size of Mr Allan’s investment in Tesco with his token holding of just 3,102 shares (worth around £19,000) in Barratt Developments.
The latest analyst forecasts suggest that Tesco will report earnings of 4.6p per share this year, rising to 8.9p per share in 2016/17. This puts the stock on a forecast P/E of 32, falling to 17 next year.
Although it’s clear that a partial recovery is already priced into this stock, I believe that the shares do offer long-term value for investors at today’s prices.