The Contrarian Investor: 5 housebuilders poised for recovery

28th May 2010

Now let's get this perfectly straight. You have to be a special kind of lunatic to invest your hard-earned money in a British housebuilder, of all things.

The arrival of George Osborne's emergency budget, with its stress on restricting householder credit and stamping on financial excess, might seem to be the final nail in the sector's coffin after a three-year period during which nearly all of Britain's builders have seen their share prices slashed by 75%, and sometimes even more.

Hardly any of Britain's builders have been making any significant profits since the start of 2007, and still fewer of them are expecting any really big upturn in their fortunes until at least 2012.

Well, fancy that, say the pessimists, and there's probably worse still to come.

The housing pool will soon be swamped by a tidal wave of buy-to-let and second-home owners, all of whom will be trying to sell their properties this summer.

You can blame that on the new government's plans to ramp up the capital gains tax rate to 40% for second homes – and, for that matter, for all non-business assets.

And the torrent of surplus supply is almost certain to drive down the price of all housing generally. Not least, the asking prices that new-build buyers will be prepared to pay.

So things could hardly look much worse, could they? Well, maybe not. But to a dyed-in-the-wool contrarian investor, the bottom of the pit is always worth looking out for. When the stock market has already factored all the bad news into the share price – and, crucially, when the existing players have an unassailable position in their respective fields – then we might just be in with a chance of picking up a blue-chip share that has only one way to go. Upward…..

Bullish Analysts

That's not just a case of brave words, either.

Surprise, surprise, practically all of Britain's major housebuilding firms are now getting high fives from the City analysts.

Okay, we'll admit that their corporate forecasts aren't exactly sparkling, and the possibility of falling into political elephant traps is not to be underestimated.

But heck, most of these companies are billion-pound concerns with established positions in the consumer marketplace – and most of them are looking as cheap as chips.

Barratt Developments

Take Barratt Developments, perhaps the biggest casualty so far.

Its share price was smashed down from 800p to just 43p between January 2007 and June 2008 – only to regain 180p last September, since when it's been sulking around the 120p mark. It gets six Buys, three Outperforms and seven Holds from the FT's listed analysts, and only two Underperforms or Sells.

Barratt announced on 13 May that it was on course for the first profits in two years; that its unsold stocks had shrunk significantly; that it had achieved 32% more forward sales in the three months to April than a year previously; and that its average selling price per housing unit had been up by 14%. Not bad. But can we do better?

Berkeley Group

Well, there's always Berkeley Group, which dropped from 1620p to 300p in the same 18-month period (ouch), only to regain the 800p level where it's been waiting ever since for further instructions from the market.

The last few financial statements have been less brash than Barratt's, but the City still gives it five Buys, three Outperforms, seven Holds and no Sells.

Bovis Homes

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