Taylor Wimpey’s a winner – here's how to play it

The UK housing market has slowed sharply over the past few years. Depending on which index you use, national house prices are either increasing at a low year-on-year rate, or they are flat. This means that once you take inflation into account, they are starting to fall.

The situation is even worse in the capital, where prices are starting to go down in nominal terms. Still, just because the housing market has come off the boil, it doesn't mean that you can't make money from building houses: one of my most profitable tips so far has been Bellway. However, it's not the only homebuilder worth looking at.

Taylor Wimpey (LSE: TW) has delivered some very strong results, with sales nearly doubling from £2.3bn in 2013 to £4.08bn in 2018. It is expected to continue growing over the next two years, helped by a large bank of vacant plots, equivalent to around five years worth of construction. This should allow it to meet future demand.

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It's important to note that most of the vacant plots that it owns are in the North, Midlands and south west of England, where prices are still rising in real terms, rather than in London and the south east, where the market is weakening.

A juicy dividend

Taylor Wimpey has also used its resources efficiently, generating a consistent return on capital employed of around 20%. This is important because it has allowed the company to satisfy investors by paying an increasing dividend while still reinvesting enough cash to keep the business growing.

It has raised the dividend more than tenfold, from 0.69p a share in 2013 to 7.6p last year. The payout is expected to more than double to 18p this year, marking a 25-fold rise from 2013 and producing a prospective yield of 11%.

These projections may prove overly optimistic, since the dividend would barely be covered by earnings at that level, but even the current level of 4.1% looks attractive.

Indeed, the most compelling reason to buy Taylor Wimpey shares is that they remain very cheap, trading at just over eight times 2020 earnings, perhaps because investors are overly worried about the future of the housing market.

While some of those fears may be justified, there seems to be a lot of pent-up demand in the market, with a general acceptance among politicians that more must be done to make it possible for first-time buyers to get on the property ladder. That is becoming easier anyway now that houses are becoming more affordable amid softer prices and rising wages; note too that mortgage payments as a percentage of average wages have been improving for several years.

I therefore suggest that you go long Taylor Wimpey at the current price of 172p. Consider betting £20 per 1p, compared with IG Index's minimum stake of £1 per 1p, putting your stop-loss at 127p. This gives you total downside of £900.

Trading techniques: elections and the FTSE

Next month we face a general election. While experts disagree about which party will be best for the economy, the evidence of the last three decades of elections suggests that, whatever the result, markets will breathe a sigh of relief when it is over.

From 1983 onwards, the FTSE All-Share rose on the day after polling day on eight out of nine occasions. While these post-election bounces tend to be small, the stockmarket surged 6% the day after the 1992 vote.

However, it's important to point out that all those post-election increases in the FTSE All Share took place when the winning party either ended up with an overall majority, or it was clear who was going to be in charge (as in 2017).

In 2010, when there was uncertainty for nearly a week about whether the Liberal Democrats would work with David Cameron or Gordon Brown, the market actually fell by around 3% in the immediate aftermath.

This means that if you think that we'll end up in a similar situation, it might be a good idea to avoid buying shares on the day of the general election.

In the medium term, things get a little more complicated.Recent history suggests that neither the scale of the majority nor the identity of the governing party seems to have a clear impact on the stockmarket's performance.

Indeed, research by IG Index has found that while the market fell nearly 10% in the six months following Labour's 2001 victory, it rose by a similar amount after their victory in 2005. Similarly, while it was up substantially six months after the 2010 election, it was down a similar amount half a year after David Cameron's unexpected victory in 2015.

How my tips have fared

This has been a very good fortnight for both my long and short tips. Four out of my six long tips went up, with Bellway going from 3,236p to 3,253p, Bausch Health Companies increasing from $23.75 to $26.21 and Volkswagen advancing from €176 to €181. International Consolidated Airlines Group ticked up from 520p to 541p.

The only two to fall were JD Sports, which declined from 772p to 751p, and Safestore, which fell from 698p to 697p. Overall, my long tips are making a combined profit of £5,078, up on £4,436 a fortnight ago.

While you might expect my short tips to have gone against me, given the advance of the S&P 500, four out of the six depreciated. Bitcoin went down from $9,400 to $8,723 and Uber from $33 to $26.71.

Wayfair plunged from $113 to $81. Twitter also fell from $30.30 to $29.21. Netflix went from $284 to $293, while Weis Markets increased from $37.13 to $39.65.

However, last week Weis went above the $40 level that I had recommended as the point at which you should take your profits. Still, even counting Weis, the profits on the short tips are £2,767, hugely up on £708.

Closing Weis and adding Taylor Wimpey means that we now have seven long tips (Bellway, Volkswagen, Bausch Health Companies, International Consolidated Airlines Group, JD Sports, Safestore and Taylor Wimpey) and five short ones (bitcoin, Uber, Wayfair, Twitter and Netflix).

Twelve positions is a manageable number, though I might consider taking profits on JD Sports, which I recommended in January, before the end of the year. I am also going to increase the stop-loss on Safestore to 650p from 625p.