Is Bellway (LON:BWY) a good pick for your Stocks and Shares ISA?

With the end of the tax year swiftly approaching, now is a good time to start thinking about how to invest any spare cash that could be put into your Stocks and Shares ISA.

It was in doing this that I stumbled across Newcastle-based large-cap housebuilder Bellway (LON:BWY), which focuses on providing traditional family housing outside of London and apartments within the London boroughs. The group pays a respectable rolling dividend yield of 4.71% and has strung together an impressive eight years of earnings per share growth. 

Bellway's shares are currently priced on a rolling P/E ratio of 7.19  and at 1.49  price to tangible book value. All seems well on the surface but if we look a little deeper there are some causes for concern...

About Bellway (LON:BWY)

In terms of price performance, the Bellway share price has seen 1-year relative strength against the FTSE All-Share index of -0.24%, yet the group's shares are superficially cheap. Analysts are currently forecasting that Bellway's earnings per share will grow by 3.22% in the current financial year. This means that Bellway is expected to take its EPS growth streak up to nine years. So, why the muted share price performance?

Housebuilders are cyclical in nature, and their share prices have come an extremely long way since the financial crash - just look at Bellway's chart:

Its shares have increased by around 600% and its peers have had similarly strong performances. With many starting to wonder if Government schemes such as Help To Buy are doing more harm than good, might the party be coming to a close for housebuilders?

It's interesting to note that Bellway currently qualifies for 13 of our Guru Screens, but one of those is for short selling: The Beneish M-Score Screen. We can see why below.

This low Beneish M-Score shows that there are areas in Bellway's accounts that might be worth closer investigation.

How the Beneish M-Score works

In 1999, a finance professor called Messod Daniel Beneish published a landmark research paper entitled The Detection of Earnings Manipulation. It showed how you can use accounting data to spot problems early. Since then it’s become an indispensable checklist for professional money managers and investment banks.

Professor Beneish’s M-Score looks at the year-on-year change in eight different ratios that can be worked out from a company’s financial statements. It looks for these red flags:

• Inflated revenues
• Declining gross margins
• Capitalised and deferred costs
• Excessive sales growth
• Lengthening depreciation periods
• Rising sales expenses
• Increasing leverage
• Higher accruals

Here is a graphic of areas it flags up for Bellway:

Next Steps

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