Housebuilders: trading bumper gains

I had good reason to think that way because since 2004 the FTSE 350 housebuilders have recorded an average quarterly return of 11 per cent in the first three months of the year, rising 10 times and only falling once. This compares favourably with the tiny 0.5 per cent average quarterly return on the FTSE All-Share index in the same three-month period. Moreover, since 1980 the sector's return has been 11.4 per cent in the first quarter, more than three times higher than the 3.3 per cent gain on the FTSE All-Share index.

A strong historical track record aside, the fundamentals supported a sector re-rating. In fact, the combination of falling energy and food costs, private sector wage inflation running at twice the rate of the UK's consumer price index on a quarter-to-quarter basis, and unemployment falling to its lowest level since the 2008 financial crisis, has created a positive backdrop for consumers and home buyers alike. Add to that a shift in interest expectations for the first Bank of England base rate rise from mid-2015 to 2016, and a sharp drop in UK government bond yields off which lenders benchmark their fixed-rate mortgages, and home buyers are currently benefiting from some of the lowest mortgage rates on record. Add to that ongoing net migration into the UK, and a supply:demand imbalance in the housing stock, and these factors have been highly supportive of the strong profit recovery we have seen across the new build sector.

In turn, these drivers have all contributed to the 20 per cent average share price gain on the nine FTSE 350 housebuilders since the end of November, a return that far outstrips the 4.3 per cent rise on the FTSE All-Share index in the same period. The only question now is whether it's worth running these huge gains until the end of March as I had recommended for this particular trade, or to take some profit off the table now?

FTSE 350 Housebuilders price performance (25 November 2014 to 5 March 2015)

Decision time

That answer is made easier by the fact that some of the share price charts are now becoming very overbought. For instance, shares in Bovis Homes (BVS) have finally hit my 980p long-term target and the 14-day relative strength indicator (RSI) is around 80. Of course, that reading could unwind through a sideways share price consolidation and the price could yet in due course hit its previous all-time high of 1,219p dating back to April 2007. But that seems highly unlikely to happen over the next three weeks, and I am happy banking a 18 per cent short-term profit now.

The same is true of Redrow (RDW) whose share price has risen by 41 per cent since mid-January and by 33 per cent on my buy-in price in November on an offer-to-bid basis. The price has also hit a technical resistance level at the February 2014 highs around 360p and given that the 14-day RSI is still heavily overbought, and the moving average convergence divergence (MACD) momentum oscillator has just given a sell signal, the sensible recommendation is to bank these gains too.

Of course, medium-term holders may prefer to run their large profits irrespective of the possibility of short-term profit taking: Bovis is still only rated on 1.45 times historic book value, offers a 3.7 per cent dividend yield and is priced on a modest 9.5 times fiscal 2015 earnings estimates, a valuation that points to longer-term upside. On the same basis, Redrow is priced on 1.56 times net asset value (NAV) estimates, rated on 9 times EPS forecasts but offers a smaller 1 per cent dividend yield. However, shares very rarely rise in a straight line and I just feel there could be a better opportunity to buy into the long-term growth story in both companies later on in the year. In any case, my housebuilder trade was only a short-term one and share price gains of 33 per cent and 18 per cent, respectively, on the two holdings can't be sniffed at.

The same is true of shares in Galliford Try (GFRD) which have risen by 31 per cent on an offer-to-bid basis since late November and, at 1,515p, are now in blue sky territory, having surpassed their previous all-time high of 1,375p dating back to February 2007. A prospective PE ratio of 14 for the financial year ending June 2015 and a price-to-book value ratio of 2.35 times is a far more reasonable valuation in my view. So although income seekers will be attracted by the 4 per cent plus dividend yield, I am happy to crystalise the gains. I would also do the same with the 23 per cent return on Crest Nicholson (CRST), a company that is now rated on double forecast net tangible assets for the current fiscal year and whose shares are coming off the boil in the short-term at least. Indeed, the MACD indicator has given a sell signal.

Please note that in aggregate shares in these four companies account for 59 per cent of the gains made on my recommended housebuilder trade, so banking profits is no bad thing given the quick-fire nature of the paper profits generated and given the technical set up on the charts. Of course, I could have just top sliced all nine holdings, a tactic I successfully employed two years ago when the homebuilders ramped ahead by 31 per cent ('Full house', 25 March 2013). My tactic then was to sell two-thirds of the portfolio and place a tight 10 per cent trailing stop-loss on the balance to protect my gains while I continued to run my profits until the end of April.

However, on this occasion, I feel if this sector rally is to continue then there will be a wide disparity in share price performance from now on due to company specific factors and news flow. On this basis, there are good reasons to believe that some of the laggards may well play catch up in the coming weeks, which is why I am happy to maintain some interest in the sector until the end of the month and intend reviewing this trade again in due course.

Running profits on selective housebuilders

For instance, shares in Bellway (BWY) are one of the lowest rated in the sector on 1.5 times forecast net tangible assets, 9 times earnings estimates and supported by a 3.5 per cent dividend yield. The interim results announcement on Wednesday 25 March 2015 should make for a good read too and with the 14-day RSI unwinding and now below 70, and the shares in blue-sky territory, I can see further upside before the end of the month as the valuation gap with rivals narrows. Run profits.

It's also worth noting that FTSE 100 constituent Persimmon (PSN) will be paying out 95p a share to shareholders on Thursday, 2 April 2015 (record date is 6pm on Thursday, 19 March 2015 to be eligible for this payment), a dividend equivalent to 5.3 per cent of the current share price. I would be inclined to wait for the shares to go ex-dividend before considering banking the 19.4 per cent short-term paper gain. Adjusted for the dividend payment, the shares are now rated on 11 times EPS estimates and on 2.2 times book value. The 14-day RSI is in the mid-60s and the MACD is still positive and above its signal line, so there seems scope for more upside especially if institutions decide to recycle (as seems probable) the forthcoming dividend payment by topping up their holdings through open market purchases. Run profits.

I would also run profits on Taylor Wimpey (TW.), a constituent of my 2014 Bargain share portfolio. The company has just announced a 67 per cent rise in underlying pre-tax profits for fiscal 2014, driven by a combination of volume growth and higher selling prices which boosted margins by a third to 17.9 per cent and provided a return on operating assets of 22.5 per cent. Buoyed by a cash-rich balance sheet the company will payout a 7.68p-a-share special dividend for July (ex-dividend date of 20 May) in addition to a final dividend of 1.32p-a-share in May (ex-dividend date of 8 April). Bearing in mind this dividend timetable, I can see continued institutional demand for the high-yielding shares - rated on 10 times 2015 EPS estimates and 1.8 times book value - ahead of these dividend payments. Run profits.

The same is just about true of Barratt Development (BDEV), another constituent of my 2014 Bargain shares portfolio, even though the 14-day RSI is overbought following a 29 per cent share price rally since mid-January. Still, the rating is fair at around 1.5 times book value, 10 times forward earnings estimates for the financial year to end June 2016 and supported by a prospective forward yield of 4.5 per cent based on a payout of 24p a share. Run profits.

Quandary to solve

The laggard amongst the nine FTSE 350 players is Berkeley Group (BKG). This is much as I had expected when I advised buying a basket of the housebuilders as the political uncertainty created by the forthcoming general election, and in particular the prospect of the introduction of a mansion tax on homes worth more than £2m by a Labour party-led coalition if elected, has subdued appetite for the shares given the company's bias towards the top-end of the market. There are also signs that the London market has cooled somewhat in recent months, part of which is down to buyer concerns over the mansion tax, a factor that the top-end housebuilder is unlikely to have been immune from.

However, it's worth pointing out that Berkeley's exposure to properties priced in excess of £2m accounts for only 15 per cent of its gross development value and a third of these homes are already pre-sold. I have a strong feeling that this point will be made by the board when the company releases a pre-close trading update on Friday, 20 March 2015. I also think income investors are likely to warm to news of a further 90p a share payout this summer, and a further 433p a share in total over the next three financial years, so on balance I would run profits targeting a return to the all-time high of 2,808p dating back to February 2014.

Finally, that leaves Aim-traded housebuilder and land developer Inland Homes (INL:65.25p), a company I have followed for the past couple of years during which time the shares have almost trebled from my recommended buy-in price of 23p when I included them in my 2013 Bargian share portfolio. I last updated my view at the start of last month when I re-iterated my buy advice at 57.5p ('A fluid performance', 2 February 2015). Since then the shares have risen 13 per cent and are closing in on my long-term target price of 70p, a valuation that is looking increasingly conservative as it's well below analysts' top-end sum-of-the-parts valuations of 100p a share. The company has released its interim results at the end of this month and an upgrade to my target price looks firmly on the cards. Buy.

I would point out that the views expressed in this column are my own as an independent commentator for Investors Chronicle and should not be confused with those expressed by the title's highly-respected sector expert, Jonas Crosland, who covers the FTSE 350 housebuilders and has all 10 companies above on medium-term buy recommendations.

MORE FROM SIMON THOMPSON...

Please note that since the start of February I have written articles on a total of 63 companies all of which are available on my IC homepage... and are detailed in chronological below with the relevant web links for ease of reference. 

■ Flowtech Fluidpower: Buy at 130p, target 165p ('A fluid performance', 2 February 2015)

■ Inland: Buy at 57.5p, target 70p ('A fluid performance', 2 February 2015)

■ UK housebuilding sector: Run profits ('A fluid performance', 2 February 2015)

■ Globo: Conditional buy at 47p, target 60p ('Going Global', 3 February 2015)

■ Epwin: Buy at 92p, target 140p ('Going Global', 3 February 2015)

■ SeaEnergy: Buy at 21p, target 60p ('Going Global', 3 February 2015)

■ Fairpoint: Buy at 119p, target 190p ('A valuable point to make', 4 February 2015)

■ Greenko: Buy at 123.5p, target 225p to 230p ('A valuable point to make', 4 February 2015)

■ Safestyle: Buy at 165p ('A valuable point to make', 4 February 2015)

■ 600 Group: Buy at 15.5p, target 24p ('Engineering growth', 5 February 2015)

■ Global Energy Development: Speculative buy at 42p ('Engineering growth', 5 February 2015)

■ Pure Wafer: Hold at 42p ('Engineering growth', 5 February 2015)

■ Faroe Petroleum: Buy at 75.5p, target 94p ('A slick operator', 6 February 2015)

■ 2014 Bargain share portfolio updates:

Barratt Developments: Run profits at 458p; Taylor Wimpey: Run profits at 135p; 1pm: Buy at 67p; Bloomsbury Publishing: Hold at 148p; Camkids: Hold at 21p; Fortune Oil: Sit tight at 10p; Charlemagne Capital: Hold at 11p; Arden Partners: Hold at 47p; PV Crystalox Solar: Hold at 10.5p ('How the 2014 Bargain share portfolio fared', 6 February 2015).

■ 2015 Bargain share portfolio buy recommendations:

Mountview Estates, Crystal Amber, H&T, Pittards, Inspired Capital, Record, Netplay TV, Arbuthnot Banking, AB Dynamics and Stanley Gibbons ('Bargain share portfolio 2015', 6 February 2015).

■ Oil price ('Profiting from the oil price slump', 9 February 2015)

■ Getech: Buy at 45p, target 67p ('Exploit a chart breakout', 10 February 2015)

■ Moss Bros: Buy at 93p, target 120p-130p ('A triple play of chart break outs', 11 February 2015)

■ Manx Telecom: Buy at 189p, target 210p ('A triple play of chart break outs', 11 February 2015)

■ Oakley Capital: Buy at 155p, target 180p ('A triple play of chart break outs', 11 February 2015)

■ Walker Crips: Buy at 45p, target 54p ('Delivering on a plan', 12 February 2015)

■ Trakm8: Buy at 92p, target 120p ('Zoming in on a profitable price move', 16 February 2015)

■ Trifast: Buy at 111p, target 140p ('Earnings upgrades to drive re-ratings', 17 February 2015)

■ 600 Group: Buy at 16.5p, target 24p ('Earnings upgrades to drive re-ratings', 17 February 2015)

■ Pittards: Buy at 135p ('Earnings upgrades to drive re-ratings', 17 February 2015)

■ GLI Finance: Buy at 62.5p, target 80p ('Income plays with capital upside', 18 February 2015)

■ BP Marsh: Buy at 135p, target 170p ('Income plays with capital upside', 18 February 2015)

■ Henry Boot: Buy at 205.5p, target 249p ('A bootiful investment', 19 February 2015)

■ Jarvis Securities: Take profits at 435p ('Decision time', 23 February 2015)

■ Avation: Buy at 142p, target 200p ('Decision time', 23 February 2015)

■ Inland: Buy at 63p, conservative target 70p ('Decision time', 23 February 2015)

■ Globo: Buy at 49.25p, target 60p ('Catalysts for re-ratings', 24 February 2015)

■ Communisis: Buy at 56p, target 85p ('Catalysts for re-ratings', 24 February 2015)

■ SeaEnergy: Buy at 25p, target 60p ('Catalysts for re-ratings', 24 February 2015)

■ Netcall: Take profits at 71p ('Taking profits', 25 February 2015)

■ Eurovestech: Hold at 8p, target 10p ('Taking profits', 25 February 2015)

■ GLI Finance: Buy at 62.5p, target 80p ('Taking profits', 25 February 2015)

■ Amino Technologies: Run profits at 137p, target 150p ('Riding bumper profits', 26 February 2015)

■ Tristel: Buy at 80p, target 100p ('Riding bumper profits', 26 February 2015)

■ 32 Red: Buy at 60p, target 75p to 80p ('Riding bumper profits', 26 February 2015)

■ Non-Standard Finance: Buy at 103p ('A non-standard investment, 2 March 2015)

■ W.H. Ireland: Buy at 92p, target 140p ('A non-standard investment, 2 March 2015)

■ Software Radio Technology: Buy at 31.25p, target range 40p to 43p ('On the radar', 3 March 2015)

■ Vislink: Buy at 48.5p, target 60p ('Tapping into e-commerce profits', 4 March 2015)

■ Sanderson: Buy at 68p, target 80p to 85p ('Tapping into e-commerce profits', 4 March 2015)

■ Town Centre Securities: Run profits at 292p ('To bank profits or not?', 5 March 2015)

■ Sutton Harbour: Buy at 36.5p ('To bank profits or not?', 5 March 2015)

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'