I started investing in shares in 1986-87, when I was 18. Over the next 25 years, I made every investing blunder imaginable (and then some). Eventually, I concluded that I didn’t need to take extreme risks to generate decent returns. Today, my cautious investment approach relies mostly on time in the market, rather than timing the market. But I made a huge mistake buying Persimmon (LSE: PSN) shares three months ago. Here’s why.
The shares peaked in February 2020
During the market’s summer lull, my wife and I built a new mini-portfolio of 10 cheap shares. We bought these value stocks for their low price-to-earnings ratios and high dividend yields. Our intention was to create a new source of passive income, either to reinvest or to offset our rapidly rising household bills. And of six FTSE 100 shares we bought, one was leading UK housebuilder Persimmon.
Founded in 1972 and based in York, Persimmon is named not after the reddish-orange fruit, but for a prize-winning racehorse owned by the Prince of Wales (later King Edward VII). The group has almost 5,200 employees and trades under the Persimmon Homes, Charles Church and Westbury Partnerships brands.
From 2010 onwards, the property boom provided great riches to the company, its directors and shareholders. At their peak, Persimmon shares hit an all-time high of 3,328p on 20 February 2020. But then the pandemic exploded, sending share prices crashing worldwide.
This stock has had a terrible 2022
After more than halving during the spring 2020 global meltdown, the share price staged a massive comeback. Indeed, by 7 June 2021, the stock was riding high again, hitting its 2021 peak of 3,272p.
On 4 January of this year, Persimmon stock hit its 2022 high of 2,930p — but it’s all been downhill since then. After watching this stock plunge this year, my wife bought into Persimmon on 26 July at an all-in share price (including dealing commission and stamp duty) of 1,856p.
Oh boy, what a mistake. As I write, Persimmon shares trade at 1,194.5p and are down 3.6% today. At this level, they’ve crashed by more than a third (-35.6%) since our purchase date. That’s easily my worst trade in at least a decade. Ouch.
Do I sell out?
Right now, things look bleak for the UK housing market. Over the winter months, domestic energy bills may triple or quadruple, putting huge pressure on household incomes. What’s more, UK mortgage rates have exploded, hitting a 14-year high earlier this week. This has made buying a new home much harder than it was just three months ago. And political turmoil continues to shake the British pound and UK government bonds.
However, we won’t be selling our Persimmon shares quite yet. At the current price, they trade on 5.2 times trailing earnings, for an earnings yield above 19.2%. Also, the previous full-year dividend of 235p translates into a colossal cash yield of 19.7% a year. Then again, given the headwinds facing new home sales, I fully expect Persimmon’s earnings and dividend to be slashed in 2022-23.
In short, we won’t be selling our stock, because we bought into this business on a 10-year view. Indeed, we may even buy more shares if the Persimmon share price keeps on falling!