StockRank Movers - Feb 17: End of the house party?

Tuesday, Feb 17 2015 by
5
StockRank Movers  Feb 17 End of the house party

Is the party coming to an end for UK house builders? House prices are still increasing, but recent figures from the Office for National Statistics suggest that the pace of increases could be starting to decline. This trend could be influenced by several factors, including stricter mortgage rules, as well as expectations that interest rates could rise after the general election. This could be bad news, but the market sometimes overreacts to bad news, thereby causing good quality stocks to become undervalued. Is this happening to stocks in the house building sector? Lets take a look at their StockRanks to explore further.

Barratt Developments (BDEV)

Barratt Developments (BDEV) has a StockRank of 96, compared to 87 in September. However, cyclical companies like house builders tend to slow down when they start to compete for land, labour and materials - pushing costs up and profit margins down. Indeed, Barratt's annual report noted that build costs have ticked upwards. The firm 'saw some upward price pressure on materials, in particular for bricks and timber.' Furthermore, a 'shortage of skilled labour did increase costs, with bricklaying the most affected area.' It is also important to note that although earnings did grow by more than 100% in 2014, Barratt's ValueRank has fallen to 50 - suggesting that the earnings growth may be factored into the share price.

That being said, Barratt's operating profit margins have actually increased from 6.3% (2013) to 13% (2014), while the Return on Capital Employed (ROCE) has more than doubled, from 4.5% (2014) to 10.3% (2014). Furthermore, Barratt plans to build over 2000 new homes in Scotland in order to meet strong demand, while brokers expect earnings to grow by another 25% over the next twelve months. To round it off, Barratt's recent trading statement noted that 'consumer demand across all of our regions has remained robust'. The management team insists that the company 'is on track to deliver a further significant improvement in performance in FY15.'

Persimmon (PSN)

Persimmon (PSN) has a StockRank of of 94, although the ValueRank has fallen to 46. Interestingly, at the start of January Jefferies (the brokers group) issued a research…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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Persimmon Plc is a United Kingdom-based holding company. The Company is engaged in house building within the United Kingdom. The Company trades under the brand names of Persimmon Homes, Charles Church, Westbury Partnerships and Space4. The Company offers a range of homes from studio apartments to family homes in approximately 400 locations under Persimmon Homes brand. The Company builds homes under Charles Church brand in a range of locations. The Company focuses on affordable social housing and sells these homes under Westbury Partnerships. The Space4 business operates an off-site manufacturing plant producing timber frames, insulated wall panels and roof cassettes as a fabric first solution to the construction of new homes. more »

LSE Price
2120p
Change
4.4%
Mkt Cap (£m)
6,753
P/E (fwd)
7.8
Yield (fwd)
11.1

Barratt Developments PLC is a holding company. The Company is principally engaged in acquiring and developing land, planning, designing and constructing residential property developments and selling the homes, which it builds throughout Britain. The Company operates in two segments: Housebuilding and Commercial developments. Its housebuilding segment operates through approximately six regions and approximately 30 operating divisions delivering over 17,319 homes. Its Commercial developments are delivered by Wilson Bowden developments. It purchases land in targeted locations and designs homes for its customers using standard house designs. Its brands include Barratt Homes, David Wilson Homes and Barratt London. Its Barratt Homes brand focuses on making homes. Its Barratt London brand portfolio offers apartments and penthouses in Westminster to riverside communities in Fulham. Its David Wilson Homes brand offers home design and specification, and focuses on developing family homes. more »

LSE Price
646p
Change
2.3%
Mkt Cap (£m)
6,577
P/E (fwd)
9.1
Yield (fwd)
7.1



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18 Comments on this Article show/hide all

underscored 17th Feb '15 1 of 18
2

I dare you to take a look around SW8, particularly Nine Elms Road? According to this FT article from January (http://www.ft.com/cms/s/0/79196466-a576-11e4-ad35-00144feab7de.html?siteedition=intl#axzz3S1omlicc,) there is currently 10 YEARS of "luxury-prime" supply currently in construction within London! Whilst I do not believe the future to be predictable I am expecting exposed home builders share-prices to produce the classic Turkey before Xmas weight distribution. UK Housebuilders are on my bargepole list along with their booming suppliers such as Energy Technique (LON:ETQ).

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Edward Croft 17th Feb '15 2 of 18
5

I think the housebuilder stock journey has been a classic example of how the style of a trade can change over the course of several years.  Back in 2011 these stocks were flagged as Ben Graham bargains in a great article by Ben Hobson on this site - coming up on early versions of the Stockopedia screens.  Barratt Developments (LON:BDEV) was trading at £1 per share back then - it's since more than quadrupled in price with strong rises across the board in the other stocks. 

Back then these were pure play contrarian value stocks with much negativity about the outlook and rock bottom valuations.   These days they are looking more and more like momentum trades - with brokers constantly upping numbers as can be seen in Persimmon's broker trend below.  The valuations today, while not stretched versus the rest of the market, are certainly at a premium versus the long term trends for these kinds of cyclical stocks which is something to bear in mind.

54e3b99e4cbaePERSIMMON_Share_Price_-_PSN

Personally I am long of £PSN , £BDEV  and £TEF .  I highlighted the sector back in the October Investor shows as some of the highest ranked on the Stockopedia StockRanks. Since then the housebuilders have added 15-20% almost across the board.  The momentum is strong and while I certainly wouldn't want to initiate a position at these levels I will continue to run the holdings until I see a marked change in sentiment and fall in the ranks.  As Jesse Livermore once said "it was never the thinking that made the big money for me, it was always the sitting" - or something along those lines.


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shanklin100 18th Feb '15 3 of 18

Hi Ed

BDEV and PSN are both just about to report results and forecasts suggest earnings will have grown strongly. Given the V metric is backward looking, presumably it is likely to improve significantly, certainly on the P/E component?

I have the same issue with BVS so would appreciate your thoughts.

Cheers, Martin

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underscored 18th Feb '15 4 of 18

Hi Ed, are there any good empirical studies looking at share price change in relation to short interest in a stock? So percentage of cases where price increases/decreases, whether those outcomes differ by QVM factors etc.

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Welshborderer 18th Feb '15 5 of 18

Galliford Try (LON:GFRD) reported today...

"Record results and excellent progress on our disciplined growth strategy to 2018.

Interim dividend up 47%, reflecting our strong performance."

Despite all the management speak in the reports of these builders there is a common theme of self-belief. Putting aside our natural prejudices against any further development in "our neck of the woods" there does appear to be furjter growth and comfortable dividends to be had from several of these companies.

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Edward Croft 18th Feb '15 6 of 18
1

In reply to post #92433

Hi underscored - we've read all the research we could gather on short interest in stocks. We are still working on our Smart Money add-on to the site which is going to be awesome, but it's still infuriatingly delayed. You can read the Short selling chapter in our ebook which may help and offer references www.stockopedia.com/books/smartmoney/

Shanklin - Yes if the earnings and cashflow of the historic numbers that constitute the ValueRank rise then the P/E and P/CF will 'fall' accordingly. So the stock may look cheaper on that basis - just remember during results season all companies are reporting, and ranks are relative rather than absolute - so overall ranking changes depend on the rest of the market.

We've argued a lot internally about whether to add forward looking (forecast) numbers into the ValueRank. While the overall ValueRank could perform better on a standalone basis if we did, the correlation with the momentum rank would increase. We're currently comfortable with the blend of the backward looking Value Rank and the forward looking Momentum Rank in the overall StockRank - nothing is sacred though!

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underscored 18th Feb '15 7 of 18

Thanks Ed, I mention it as short interest in the London exposed house-builders is growing.

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jjis 18th Feb '15 8 of 18

In reply to post #92463

"I mention it as short interest in the London exposed house-builders is growing."


That's funny as I have just called up the latest FCA short report and there is not a house builder on it apart from Galliford Try which also has a construction arm. So not sure what the basis for your above statement is?

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JohnRMurdoch 18th Feb '15 9 of 18

Motley Fool suggested there was short interest in Berkeley (BKG), but I could find no evidence t back this up.

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herbie47 18th Feb '15 10 of 18

I have read that the best quarter for housebuilders in terms of sp going up is December - February, has gone up average of 8% over last 5 years, only 1 year it went down, this year looks like being the same. So Im reducing my holdings as feel Im overweight in that sector, just sold PSN and BVS, will sell TW and maybe BDEV, then have a look at them after the election. But I don't think housebuilders are bad, profits still growing but maybe not so fast, there is plenty of demand for houses, but future less certain, maybe interest rates will rise at year end and labour costs are rising.

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herbie47 18th Feb '15 11 of 18

In results I think profits will be up, but rate of growth will be down, this has already been stated in trading statements which is why the sp fell a few weeks ago.

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underscored 18th Feb '15 12 of 18

In reply to post #92466

Hi Jjis, thanks for highlighting, I shouldn't believe all I read on the internet. In my amateur state I did not even know about the FCA disclosure list! Berkley Group is on the list.

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jjis 18th Feb '15 13 of 18

In reply to post #92484

Oh yes quite right I missed it the first time I scanned the list sorry - makes sense as London seems quite frothy I guess and Odey is bearish.

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rockyistanbul 24th Feb '15 14 of 18

Thanks for the article and comments. All very helpful. As a newbie to Stockopedia,could I ask you Ed to elaborate on your comment re BDEV: "The momentum is strong and while I certainly wouldn't want to initiate a position at these levels"? To me, looking at BDEV's Stock Report in isolation, based on all the "green" lights, scores, broker recommendations etc, does it not suggest it might be a good time to "initiate"?

I understand the need for deeper research, also the Value ranking hints at potential overvaluation, but it would be useful if Ed's conclusion was somehow more apparent from the Stock Report. This begs the question as to whether I am missing something from my interpretation of the stock report?

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herbie47 24th Feb '15 15 of 18

In reply to post #93002

I think he means the value is not so good now, if you have the shares then hold but for buying more then no. As for brokers quite a few have gone negative on valuation grounds. I feel momentum is losing steam and I would not be surprised if there is a fall soon. As I said before there are a few things going against housebuilders at the moment.

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WarrantStar 25th Feb '15 16 of 18

Very good results today from Barratt Developments (LON:BDEV) with EPS for last 6 calendar months of 2014 up 79% compared with same period in 2013. Yet the share price is going down. I have just sold my holding because I think the following factors are affecting the share price:
1) Worries that interest rate rises are on the horizon and this will increase mortgage payments and reduce sales of new houses.
2) Uncertainty about the general election and who will be in control of a likely hung parliament.
3) We are getting rather late into the economic cycle to be buying (or maybe even holding) shares in the Consumer Cyclical sector. (For some reason Barratt Developments is listed as being in the
Financials / Real Estate Operations for sector / industry, whereas all the other house builders are shown in the
Consumer Cyclicals / Homebuilding & Construction Supplies sector / industry.)

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herbie47 26th Feb '15 17 of 18

Yes good results but I think that was already in the sp, it has gone up a bit today, I'm still holding but have sold some others recently. I think you are right but there are several other negatives, house prices are not rising so much now esp. London so growth will not be so fast, als labour costs have increased considerably recently, so profits will be squeezed. Yes I think you are wise to take some profits, Im holding on for special divi but if sp hits 550 I may bail out.

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herbie47 26th Feb '15 18 of 18

In reply to post #93151

Yes good results but I think that was already in the sp, it has gone up a bit today, I'm still holding but have sold some others recently. I think you are right but there are several other negatives, house prices are not rising so much now esp. London so growth will not be so fast, als labour costs have increased considerably recently, so profits will be squeezed. Yes I think you are wise to take some profits, Im holding on for special divi but if sp hits 550 I may bail out. - See more at: http://www.stockopedia.com/content/stockrank-movers-feb-17-end-of-the-house-party-92346/?submitted=17#17

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