FTSE housebuilders have come under the cosh in recent weeks. Of course, they’re not the only industry suffering in what is a broad market crash. However, I’m particularly interested in the sector right now.
This is because I’ve been bearish on housebuilder stocks for a good while, but always maintained there’d be a right time to buy. Could now be the perfect time?
FTSE housebuilders bear
To understand my view on whether there’s now a compelling bull case for housebuilder stocks, you’ll need to understand my bearish position. My starting point is that housebuilding is a notoriously cyclical boom-and-bust industry. There’ll always be something that triggers a bust. It’s never ‘different this time’.
In recent years, FTSE housebuilders posted record profit margins and returns on capital employed (ROCE). At the same time, they sported low price-to-earnings (P/E) ratios and huge dividend yields. For the average investor focusing only on P/E and yield, the stocks looked like no-brainer buys.
However, brilliant operating metrics and ‘cheap’ P/E and yield valuations are entirely typical features at the top of a housing cycle. It may be counter-intuitive, but that is the time for value investors to be cashing out. In other words, ‘selling high’.
Conversely, the time to be ‘buying low’ is when profit margins and ROCE are awful. P/Es are sky-high, due to the collapse in earnings. And yields are low or non-existent, due to the cutting or suspension of dividends.
There’s also one valuation measure – price-to-tangible net asset value (P/TNAV) – that indicates whether housebuilder stocks are expensive or cheap. P/TNAVs are high (expensive) at the top of the cycle and low (cheap) at the bottom.
Time to turn bullish?
In light of my above views on FTSE housebuilder valuations, do I think the stocks are now into ‘buy’ territory?
In a research note last week, Peel Hunt analyst Clyde Lewis included a handy table of housebuilders’ P/TNAV valuations. I’ve updated the share prices and current valuations in the table below (and only included FTSE 350 firms).
|
 |
Current share price (p) |
Last reported TNAV (p) |
P/TNAV |
|
Persimmon* |
1,793 |
963 |
1.86 |
|
Barratt* |
443 |
405 |
1.09 |
|
Berkeley* |
3,539 |
2,454 |
1.44 |
|
Taylor Wimpey* |
116 |
101 |
1.15 |
|
Bellway |
1,191 |
2,475 |
0.48 |
|
Redrow |
357 |
482 |
0.74 |
|
Vistry |
545 |
858 |
0.64 |
|
Crest Nicholson |
176 |
321 |
0.55 |
|
McCarthy & Stone |
69 |
132 |
0.52 |
* FTSE 100 members
To put some of the above valuations into context, when I looked at FTSE 100 volume builders Persimmon, Barratt, and Taylor Wimpey last summer, their share prices were 2,188p, 594p, and 181p. And their P/TNAVs were 2.32, 1.65, and 1.84.
Their P/TNAVs actually went even higher, following the post-Boris-election rally. When I penned another bearish article in January, their share prices had reached 2,850p, 792p, and 210p, respectively.
As you can see from the table, the three stocks are now markedly cheaper. Furthermore, there have been some positive developments – at least for the signals of my buy-low investment thesis. Many housebuilders, including the blue-chip volume trio, have cancelled their dividends.
However, on balance, with their P/TNAVs still above 1, I’m inclined to avoid Persimmon, Barratt, and Taylor Wimpey at this stage.
On the other hand, the mid-cap FTSE housebuilders are beginning to interest me. This is because they’re all trading at sub-1 P/TNAVs. I think it could be time to do some deeper research into their balance sheets and business models.