How much longer can the bull run last for stocks in the housing sector? A statement from the property development company, Abbey, suggests that things may be about to slow down. Abbey’s preliminary statement warns that ‘the sweet spot of the UK cycle is probably behind us.’ This causes a conundrum as although the company’s management team sees danger ahead, Abbey’s StockRank has jumped from 81 to 98 over the last month. From a pure quantitative basis Abbey’s statistics have improved… should we trust the quant, or trust the management?
End of the cycle?
Abbey is a property development company which generates most of its revenue in the UK and Ireland. The firm also operates in the Czech Republic. In 2011, Abbey’s earnings fell by 22% while revenues dropped by more than 30%. In the UK and Ireland, this trend was driven by a fall in disposable incomes, coupled with the highly restrictive mortgage market, which placed significant constraints on house sales. Cyclical stocks tend to perform badly during recessions, but often bounce back when the economy recovers. Indeed, since 2011, the company's share price has risen by more than 130% while earnings have increased from €0.37 per share (2011) to €1.81 (2015). 2014 and 2015 both saw strong progress as the economic recovery gathered momentum in the UK, supported by the government’s ‘Help to Buy’ Scheme.
Worryingly, there are some phrases in the company’s recent statements which suggests that Abbey’s management team could see the end of the road for Britain’s housing bull market. In The Zulu Principle, Jim Slater highlights several red flags for cyclical stocks. He explains that as business cycles runs into bear territory, businesses ‘compete for both land and labour. Cost pressures begin to increase. Some of the builders borrow to stock-pile land. Very soon there is over-capacity in the business...’
Has this process already started for Abbey? The company’s annual report for 2014 noted that ‘It is a cause of concern that supply chain bottlenecks both in labour and materials have emerged so quickly.’ There is no evidence that this has created cost pressures just yet. The company’s recent statement explains that house ‘price rises have continued, for the time being, to outstrip rising costs’. However, the company seems to be unsure how…
