Full house

This has great relevance for me right now because this is precisely the position I find myself in since we are sitting on substantial paper profits on the eight FTSE 250 housebuilders I advised buying at the start of the year ('Foundations of a rally', 10 Dec 2012). In fact, if you had bought at the opening prices on Wednesday 2 January 2013 as I had advised, you are now showing an average gain of 21.9 per cent on these eight holdings calculated on an offer-to-bid basis. To put that into some perspective, that equates to an annualised return of 141 per cent. It also compares very favourably with the 9 per cent return on the benchmark FTSE All-Share index in the past 11 weeks and means the sector has outperformed the market by more than 12 per cent since the start of the year.

Moreover, the housebuilding sector has produced bumper risk adjusted returns because if you had bought all eight housebuilders in equal amounts and simultaneously bought the Deutsche Bank short FTSE 100 ETF (XUKS) to hedge off downside risk from the eight holdings as I suggested was one way of playing this strategy, then the net return from this classic long-short pair trade is an eye-watering 14.8 per cent in just 11 weeks. The net return is almost double the average 7.7 per cent 'alpha' the trade has created on average in the first quarter in the 33 years since 1980. Moreover, in only six of the 29 years since 1980 when the sector has risen in the first quarter has the 'alpha' been higher than it currently is.

Short-term trading profits

We have also benefited from a very profitable short-term trade on northern-England-based player Bellway (BWY: 1203p), a company I advised buying shares in at 1,101p seven weeks ago ahead of what I anticipated would be a very bullish trading statement ('Profit from the London property boom', 30 January 2013). The company didn't disappoint and even though the shares rose by almost 6 per cent to 1,158p in a matter of days following my article, I had no hesitation in reiterating the advice and giving a 1,250p fair value target price last month ('Seeking alpha among the housebuilders', 11 February 2013). And, following the Budget last week, shares in all housebuilders have surged further and Bellway hit an intraday high of 1,240p, within a whisker of my target price, to provide us with a 12.6 per cent return on an offer-to-bid basis.

Drivers of price rises

It's easy to see why investors have been pumping up the prices of housebuilders post the Budget, because what Chancellor of the Exchequer George Osborne has created with his so called 'Help to buy' initiatives to get the UK housing market moving again are the conditions to stoke and create the price inflation that housebuilders desire. Undoubtedly, it could prove a vote winner, too. But don't think for one minute that housebuilders will ramp up the supply side to rebalance the shortage of housing in the country. There is absolutely no chance of that happening. Let me explain why.

If mortgages are easier to come by given massive government guarantees, and even free for borrowers able to access an interest-free loan on a fifth of their mortgage, then the drivers are clearly in place to breathe life into the moribund parts of the market. It will also add fuel to the hot areas of London and south-east England, which are riding highs right now. And that means higher house prices. So the only question you have to ask yourself is why on earth would the country's leading builders ramp up supply, which would have the effect of containing the likely rise in house prices, when all they have to do is maintain normal build rates and enjoy a sharp rise in operating margins resulting from higher house prices?

It's not a difficult decision to make because with the major players reporting margins in the range of 8 to 12 per cent in their recent results, then even a modest 6 per cent rise in house prices - which would drop straight down to the bottom line - has the effect of raising their operating profits between 50 and 75 per cent. And the higher prices go, the higher their margins will become, assuming supply is held in check, which will drive earnings even higher.

Now that's important because at the current time the housebuilders are starting to look pricey. Consider Bellway's shares, for example. They are currently trading on 14.5 times prospective EPS of 85.7p, are rated on 1.25 times book value estimates of 1,000p a share and offer a forward dividend yield of 2 per cent for the 12 months to 31 July 2013. Before the Budget, analysts were predicting a 10 per cent rise in turnover to £1.21bn in the 2013-14 financial year, which would drive pre-tax profits up to £168m and EPS to 106p. On this basis, Bellway's forward rating is 11.8 times earnings for the 12 months to July 2014 which, in my view, is fair value.

But if we now factor in conservatively another 4 per cent of revenue for the 2013-14 financial year to reflect higher house prices resulting directly from the 'Help to buy' initiatives, Bellway's pre-tax profits and EPS rise by a further 30 per cent to £218m and 136p, respectively, and margins increase to 18 per cent. At this point, the shares all of a sudden look far from expensively rated on nine times earnings estimates for 2013-14. You can do the same calculation with all the other homebuilders, too, and come out with similar results.

A happy problem to solve

This leaves me in a bit of a conundrum because I always intended to bank the huge gains on the eight FTSE 250 listed housebuilders at the end of March. But one way around this conundrum is to top-slice my holdings by selling two-thirds of the portfolio and placing a tight 10 per cent trailing stop-loss on the balance to protect my gains while I run my profits until the end of April, a month that has in the past produced bumper returns for equities.

This way, if the market were to fall, I have some of the bumper gains in the bank and am only forfeiting part of my paper profits back to Mr Market. However, if the housebuilders continue to run up then I have some skin left in the game to benefit from what could be some quite sharp earnings upgrades from analysts, which would help underpin the rise in sector share prices we have seen this quarter. I have placed specific target prices on all eight shares using technical analysis and, if these are hit, I would advise banking the rest of your profits.

FTSE 350 Housebuilders' performance in 2013

Small-cap trading plays

I will shortly be off on sabbatical to write my next book, 'Profitable stock picking', the follow-up to 'Trading Secrets: 20 hard and fast ways to beat the market'. However, before I leave, a host of small-cap stocks I have been following have reported trading news and need updating.

My advice to buy shares in Jarvis Securities (JIM: 269p), a stockbroker and financial services outsource provider, has provided us with some bumper profits in double-quick time ('A solid income buy', 25 February 2013). In fact, following the company's annual meeting last week, the shares moved above my target price of 260p and, on a spread of 266p-271p in the market, the paper profit is over 20 per cent on this holding.

The move looks well founded, too, because, according to analyst Nick Spoliar at broking house WH Ireland, the company's cash under administration now exceeds £100m, client numbers have grown in double digits in recent years to over 60,000 and, following upbeat results a month ago, the positive trends have continued into the current financial year. In fact, at the annual meeting last week, chairman and chief executive Andrew Grant noted: "Trading in the year to date has been at the upper end of management's expectations and the results for the half-year are expected to exceed those in the same period last year."

In the circumstances, it looks highly likely that Jarvis will be able to raise pre-tax profits from £2.35m to £2.6m as WH Ireland predicts this year, which would lift adjusted EPS from 16.6p to 18.1p. It is also starting to make next year's estimates of pre-tax profits of £2.9m and EPS of 19.8p look conservative. Moreover, it also means that the 12.5p-a-share dividend for 2013 and 13.9p payout for 2014 are well supported since Jarvis has a policy of paying out two-thirds of net earnings as dividends.

On this basis, the shares are now trading on 13 times 2014 earnings estimates and offer a yield next year of 5.1 per cent. They are also priced below WH Ireland's newly raise target price of 300p, up from 280p previously. So, if you followed my earlier advice I would continue to run your profits and my new fair value target price is 285p.

A stamp of authority

Stanley Gibbons (SGI: 276.5p), the most famous name in stamps and a company that has been around for over 150 years, has released another bumper set of results.

In the 12 months to end December, underlying pre-tax profits were up 11 per cent to £6m on flat sales of £35.7m as the company shifted to higher-margin business. In turn, this drove up adjusted EPS by 10 per cent to 21.4p and paved the way for an 8 per cent hike in the divided to 6.5p a share.

Internet sales from core website, www.stanleygibbons.com, surged by over half in the year and the new Hong Kong office produced a trading profit of £0.7m on sales of £2.6m, including sales of £1.9m transacted to residents outside of Hong Kong. Interestingly, the company is seeing strong demand for Chinese rare stamps and sales here rocketed by £1m to £2.1m. The auction business is doing well, too, and commissions were 60 per cent ahead in the year, reflecting the sale of the prestigious 'Arnhold Collection'. The move into collectables is paying off, too, and sales of rare coins and military medals rose almost a third to £1m and profits doubled to £0.2m. Chief executive Martin Bralsford sees "considerable growth potential in this area of collectables", and I would agree.

That said, the shares have had a fantastic run since I advised buying a year ago at 178p and we have also booked dividends of 6.25p a share, too ('Bargain shares', 10 February 2012). This gives a total return of 57 per cent net of dealing costs and, priced on a more reasonable 14 times earnings, I now think the shares - to sell in the market at 273p - may need to consolidate the gains made. It's time to bank profits.

ebooks drive Bloomsbury sales

Growing demand for ebooks has been doing wonders for Bloomsbury Publishing (BMY: 114p), the company best known for JK Rowling's Harry Potter books and weaving magical profits from the titles, too.

In the six months to the end of August, ebook sales rocketed 89 per cent to £4.5m, to account for 10 per cent of the publisher's revenues, and they ramped up a further 58 per cent in the final four months of 2012. Bloomsbury's exposure to this fast-growing segment is clearly positive, but this does have an impact on the timing of the revenues since these sales generally peak in January and February following the sale of e-reader devices at Christmas. Moreover, academic sales, another major revenue stream for the publisher, peak at the beginning of the academic year, in September and October. Since these two revenue streams account for a higher proportion of total turnover, the proportion of the company's profits accruing in the second half of the financial year increases. This not only skews the results, but also means that the risk to earnings is greater, too, which creates uncertainty.

However, Bloomsbury's chief executive, Nigel Newton has just revealed that results for its last financial year will be bang in line with analyst estimates. He also confirmed that the publisher also hit its budgeted rights sales, too. So, based on Peel Hunt’s full-year pre-tax profit estimate of £11.7m, the company is expected to report adjusted EPS of 12p and pay a dividend of 5.5p per share for the 12 months to the end of February 2013. For the current financial year to February 2014, analyst Malcolm Morgan predicts pre-tax profits of £12.2m, EPS of 12.7p and a raised dividend of 5.7p.

On that basis, Bloomsbury's shares, at 114p, now trade on less than 10 times historic earnings and offer a yield of 5 per cent. Net of a cash pile of £7.7m, worth 10p a share at the end of December, that multiple drops to eight times prospective earnings. Bloomsbury's shares are also priced a hefty 24 per cent below NAV of 150p a share. So although they are trading in line with my original buy-in price ('Bargain shares', 10 February 2012), I continue to rate them a buy.

Enlightening results

Shares in solar wafer maker PV Crystalox Solar (PVCS: 10.75p) were marked down post results last week mainly as the company failed to enlighten investors on the scale of the forthcoming payout in June.

We already knew the figures themselves would read like a horror story as a €82.5m (£70.2m) impairment charge - mainly from the closing of a plant in Germany - and €83.5m of inventory writedowns and contract charges with raw materials suppliers led to huge exceptional costs. These were only partly offset by a €90.6m gain on the cancellation of customer contracts, which meant the company ended the year with cash of £76.4m, or 18p a share, at current exchange rates. We will have to wait a few months to find out how much of that cash will be paid back to shareholders, but if the business can turn cash neutral this year (by slashing production and renegotiating supplier and customer contracts), then it is reasonable to assume a sizeable amount of that will be returned.

This is not just a forlorn hope either because, although silicon wafer prices have crashed below production costs, due to Asian overcapacity and oversupply issues, boss Ian Dorrity believes spot prices have now bottomed. He believes the industry is at a tipping point and notes that Chinese companies have been forced to change their behaviour and Suntec, a major supplier, has actually filed for bankruptcy. The European Commission investigation into wafer dumping reports in June and imposition of duties on Asian supply would be favourable for the company and its share price. Trading on a bid-offer spread of 10.5p to 10.75p, down from the 12.1p I advised buying at a couple of months ago ('Seeing the light', 21 January 2013), the shares remain a trading buy.

MORE FROM SIMON THOMPSON ONLINE...

Since the start of this year I have written 51 online articles, all of which are available on my homepage. These include four articles on the following companies last week:

Bezant Resources ('Double your money on a copper bottom investment', 20 March 2013)

Thalassa ('Potential for seismic gains', 19 March 2013)

Greenko ('Buy signal flashing green', 18 March 2013)

Communisis, Polo Resources, Randall & Quilter, Terrace Hill, Fairpoint ('Bumper small-cap gains', 18 March 2013)