The stock market crash is throwing up dirt-cheap FTSE shares wherever you look. You need to approach with care, though, as some are more dangerous than others.
The big question is whether you are taking on an acceptable level of risk, given the potential returns. I believe FTSE 100-listed Barratt Developments (LSE: BDEV) is tempting at today’s low price despite housing market worries. Another dirt-cheap housebuilder, FTSE 250-listed Crest Nicholson Holdings (LSE: CRST), looks somewhat riskier.
Barratt and Crest Nicholson are both falling today, following new Bank of England figures showing mortgage approvals have tumbled to a fresh low.
Analysts expected around 25,000 mortgage approvals for house purchases in May. Instead, there were just 9,273. That is a dreadful figure, if you are in the business of building new homes. No wonder these housebuilders have dirt-cheap share prices today.
However, I do not think it reflects the long-term story. Ultimately, we live on a crowded island, and demand for property dramatically outweighs supply. The housing market was bound to struggle in the wake of the pandemic, and that is exactly what we are seeing today.
Dirt-cheap FTSE share opportunities
You still cannot rule out a house price crash as people lose their jobs when furlough ends. Almost two million have taken mortgage payment holidays, showing how many are in difficulty. You should only buy today if you plan to hold for the long term. Minimum five years. Ideally, 10 or longer.
The Barratt share price trades at just 6.81 times earnings, while Crest Nicholson is yours for a dirt-cheap valuation of 5.64 times earnings.
Of the two, I would favour FTSE 100 stalwart Barratt. Balance sheet strength is vital, and the £5bn group boasts around £430m in cash. It can also call on £700m worth of undrawn credit. That should keep operations ticking over until people start buying houses in greater numbers.
Crest Nicholson should also have the liquidity to survive challenging market conditions. This includes a £250m revolving credit facility expiring June 2024, £100m of senior loan notes, and a further £300m through the CCFF commercial paper programme, undrawn at present.
Investors are wary, though. Over the last month, Crest Nicholson is down 18%, while the Barratt share price has held steady.
Always understand the risks
Last week, Crest Nicholson reported that revenues slid 52.2% to £240m, in the six months to 30 April. Adjusted pre-tax profit fell 93% to £4.5m. Home completions fell by a third and the average open market selling price was down 16.7% to £344,000.
Barratt and Crest Nicholson both dropped their dividends in March, to preserve cash and protect balance sheets. That also explains why they are dirt-cheap FTSE bargains.
I think this is a good time for brave investors to take a few risks, provided they plan to buy and hold for the long-term. I’m talking five years or longer. On those terms, Barrett offers an acceptable level of risk. Crest Nicholson looks a bit more edgy, but some of you might think it is a risk worth taking.