Is it Time to Sell Housebuilder Stocks?

THE WEEK: Morningstar columnist Rodney Hobson comments on the recent fall in housebuilder stocks - and whether it is a sign of things to come

Rodney Hobson 12 January, 2018 | 3:10PM

Housebuilder stocks have fallen in value

In the previous two lengthy housing booms the doomsters were forever prediction that the good times for the sector would come to an imminent end. Say it often enough and you are going to be right one day. It’s happening again, so the question is whether the end is once more nigh.

We have had positive updates from housebuilders for the past eight years, which is why I bought shares in Barratt Developments (BDEV), Taylor Wimpey (TW.) and Bovis Homes (BVS). Only my original purchase in Barratt was premature, and even that is way ahead now. I am very reluctant to sell even though I could take excellent profits.

Since New Year the sector, which incidentally has kept the sluggish construction industry going for the past couple of years, has produced another series of excellent updates. For example, Taylor reported completions up 5% and Persimmon 9%. Yet shares have fallen in response across the board.

The stock market isn’t always right but it does have a tendency to spot trends before they become readily obvious and investors should consider whether growth in this sector is indeed maturing.

We still have a dire housing shortage and the massive exodus of European Union citizens that many feared would follow the Brexit referendum shows no signs of happening. However, a whole generation has given up hope of scraping together a deposit on a house purchase and is, bluntly, waiting for my property-owning generation to die so that they can inherit one.

Meanwhile we are at last seeing a mention of rising building costs work their way into the trading updates. This is not yet a major worry, as most builders have plenty of building plots already bought so they are at least immune to rising land prices for now, but it does mean that the relentless widening of margins is probably over.

Part of the fallback in share prices is no doubt a reaction to the excessive rise over the past eight years. While I have long argued that every portfolio should contain a housebuilder, investors would be wise to consider whether, like me, they are overweight in the sector. I won’t be pruning my holdings yet, as growth in profits will continue at a slower pace, but if you choose to do so I wouldn’t care to argue against such a move.

Food for Thought

The best one can say about the latest update from Marks & Spencer (MKS) is that it made a change from a long line of quarterly statements. Unfortunately, the change is that food, which has provided a bulwark against falling sales in clothing and housewares, is now also struggling. That is seriously bad news.

This column warned last week that better figures from Next (NXT) would not necessarily translate into a similar improvement at M&S and so it has proved. They often go in opposite directions.

To add insult to injury, food generally did better than clothing elsewhere in the retail sector. Yes, there were exceptions, for example Ted Baker (TED) boosted clothing sales. However, it was the brighter performance of the three listed supermarkets, in sharp contrast to profit warnings from Debenhams (DEB), Moss Bros (MOSB) and Mothercare (MTC), that stood out. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Barratt Developments PLC510.00 GBX-0.78-
Bovis Homes Group PLC996.20 GBX-1.17-
Debenhams PLC8.90 GBX0.96-
Marks & Spencer Group PLC284.20 GBX-0.66-
Moss Bros Group PLC34.05 GBX-0.29-
Mothercare PLC19.68 GBX-0.71-
Next PLC5,176.00 GBX-2.52-
Taylor Wimpey PLC156.65 GBX-2.19-
Ted Baker PLC2,026.00 GBX0.60-
About Author Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.