Weak housing market might not hold down these shares

The housing market looks to be at some point of inflection and investors are, understandably, nervous about businesses reliant on its well-being. However, the dynamics of the mortgage market differ somewhat from the housing transaction market and it is possible for businesses ploughing new or different furrows to sustain growth even in seemingly difficult times.

Perceptions can also be wrong about a single business based on passed missteps that can blind investors to positive changes, internal and external. It can often be beneficial to revisit stocks that one has chosen to judge negatively or even written off as a bad lot. Times do change.

This week we take a look at three UK-listed companies where, in each case, baked in perceptions could be the reason potential for decent total shareholder returns is being overlooked.

Mortgage Advice Bureau (MAB1)  –  a year ago we were concerned that MAB’s outlook for physical expansion into an increasingly digital world of mortgage advice, and into a slowing housing market after the surge during Covid, could not support a 40x PE ratio (share price divided by earnings per share). A share price drop and a potentially transformational acquisition have, in effect, caused the shares to de-rate by c.60 per cent to a point where fresh potential feels overlooked and housing market risk is over-promoted. MAB has potential to see EPS rise by 70 per cent between 2022 and 2024 and all on just a 15x PE ratio. Throw in a more generous dividend and comfortably double digit total returns look to be on offer here. 

Paragon (PAG) – the mortgage market has become riskier, but Paragon’s focus on the professional landlord market and rapid expansion of its higher-margin commercial loans business should ensure solid progress, assuming the housing market doesn’t implode. We don’t think it will, but some wind back after two surprisingly strong years does feel inevitable. The surge in house prices has materially de-risked the mortgage portfolio and overall it feels as if the market still attaches to Paragon something of the risk profile it had at the end of the global financial crisis: in reality it is a much stronger and better capitalised business. If RoTE (return on tangible equity) can be sustained the shares could be 25-30 per cent undervalued, but in turbulent markets investors seem happier to move ahead on proof rather than faith. However, with buybacks and a decent yield, there is scope to see double-digit total shareholder return (TSR). 

Morgan Advanced Materials (MGAM) – it can sometimes be confounding as to how a company can be growing well, hold leading market positions and be on the cusp of a new phase of acquisitive growth, but still the stock stands on a rock bottom rating. This is certainly the case with MGAM, but when looking at this stock one needs to be mindful of a troubled past that has left investors uninterested and dismissive of this business. While the shares look cheap, it is hard to see from where the catalyst to get investors re-engaged will come. In time, value is likely to show here, but one needs to buy with a relatively long time frame in mind.