In case you’re wondering, a seven-bagger is any investment that appreciates to seven times its original purchase price. So a two-bagger would be where a company’s share price has doubled, in other words achieved a 100% gain. We all live in the hope that our investments will one day turn out to be multi-baggers, but the reality is that very few actually do. Most portfolios tend to be littered with zero-baggers or even negative baggers. Ouch.
600% gain
One common misconception is that multi-baggers can only be found from among the smaller fledgling companies, but this is far from true. The mid-cap FTSE 250 index and even the blue-chip FTSE 100 can quite often yield muti-baggers if given enough time, and patience.
One such company is leading UK housebuilder Redrow (LSE: RDW). With annual revenues hitting record levels of £1.38bn last year and pre-tax profits of £250m, Redrow can hardly be classed as a minnow. But in less than a decade this well-known firm has seen its share price rise from below 64p in 2008 to today’s levels nudging 500p. But of course this is no accident. The Flintshire-based group has achieved uninterrupted year-on-year growth in both its revenues and underlying earnings since 2009.
Record breaker
Last month the FTSE 250-listed firm announced its interim results for the six months to 31 December. The group reported a 23% rise in revenues to a first half record of £739m, with pre-tax profits up by an impressive 35% to £140m, also a new record. The number of legal completions during the period increased 13% to 2,459, adding to the UK’s much-needed supply of new homes. The strong growth has prompted management to hoist the interim dividend by 50% to 6p per share.
I like the fact that the group is always looking for opportunities to expand, last month purchasing Radleigh Homes, a regional housebuilder based in the East Midlands. Radleigh will now form the basis of a new division within the enlarged group. Despite current uncertainties, customer traffic and sales have remained robust, and Redrow has entered the second half of its financial year with a record order book. With a forward P/E ratio of just eight and a rapidly rising dividend, Redrow’s shares look well positioned for long-term growth.
A better alternative?
Another well-known UK housebuilder that’s trading on a very attractive valuation at the moment is Bellway (LSE: BWY). In the six months to the end of January, the Newcastle-based housebuilder posted a 6.5% rise in the number of housing completions to 4,462, compared to 4,188 during the same period a year earlier.
Perhaps more importantly from an investor’s standpoint, Bellway now has a substantial forward order book with a value of £1.12bn comprising 4,487 homes. Geographically, all divisions are performing well, with sales prices and demand in London remaining firm, where there continues to be a significant requirement for affordable homes.
Bellway could perhaps be a better option than Redrow at the moment, with a similar valuation at eight times forward earnings, but a chunkier dividend yield of 4.3%, compared to just 3% for Redrow.