Email of the day
Comment of the Day

August 12 2015

Commentary by David Fuller

Email of the day

On UK house builders:

Thanks for your as always illuminating response to my last query.

Now I have a new one.  Can I ask you to focus your attention for a moment on UK house builders?   I assume that as a UK resident you must hear the subject of house prices discussed quite often.   House builders have been a colossally successful area, that is if one doesn't look further back than the near-total wipeout in 2008!  So I would like to establish a long-term position in them, but timing is difficult.

I had a lucky call on them just before the election, but sold again afterwards waiting for a correction, which just hasn't happened. They look quite extended relevant to the 200-day MA, but momentum is strong.  How do you read these charts, and what views do you have on the fundamentals?  The big ones are Barratt Developments BDEV, Taylor-Wimpey TW and Persimmon PSN.

David Fuller's view

Thanks for your opening comment.

Actually, I avoid house price conversations wherever possible.  For social chats, anything from cricket to music is infinitely more interesting. 

Charts are also of interest so here are Barratt Development (est p/e 14.19 & yield 2.09%), Taylor-Wimpey (est p/e 13.46 & yield 1.01%) and Persimmon (est p/e 13.99 & yield 4.63%).

You certainly understand your charts, so yes, they are somewhat overextended relative to their MAs but momentum is strong, as you point out.  We have a majority government which is very keen to see more houses built, preferably on brown rather than green field sites.  Given seasonal jitters extending through October, the chance of mean reversion towards the MAs in the next two months is quite high, especially if we see some evidence of upside failure quite soon.  Mean reversion would provide a buying opportunity, as we have seen previously in this cycle.  However, if these shares maintain their momentum, you could buy perhaps half of your allocation, because valuations are not expensive.  Moreover, Persimmon’s yield is terrific.  

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