All house builders should benefit from a positive environment for new housing, but some construction stocks will do better than others.
Construction stocks to buy
Taylor Wimpey (LSE: TW) has national coverage and a large range of house types providing it with exposure to most eventualities. Its CEO is from a planning background and, as a result, it is well positioned for a freeing up in the land market.
Persimmon (LSE: PSN) is generating returns far below its old levels, leaving plenty of room for improvement. It is well exposed to parts of the country where the affordability of housing is less stretched and is, therefore, less at risk if high mortgage rates remain unhelpful.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
MJ Gleeson (LSE: GLEE) has the purest exposure to houses built for those on a lower income and, therefore, those most positively affected by plans to improve the affordability of housing. The types of houses built by MJ Gleeson are likely to be favoured by the new government, which made affordability a key election point.
Vistry (LSE: VTY) has perhaps the greatest potential because it is converting from being a traditional house builder to using a partnership model. Partnerships require much less capital and since Vistry is still transitioning to the model, its balance sheet is strong. At present, the plan is to return almost a quarter of the market capitalisation in shareholder returns. But much of this return is discretionary and, should growth opportunities increase significantly, Vistry is uniquely well-placed to fund the expansion. Additionally, its partnership model means it is in the best position to fulfil any strategic housing developments such as those from local housing authorities.
Turn your attention to the supply chain
However, the greatest investment opportunities may lie within the supply chain, where the capacity for a sudden increase in demand is most constrained. Here simple supply and demand dynamics make for an attractive backdrop. There will be a delayed response to bringing on new supply of heavy raw materials, as opening new factories and quarries takes even longer than new housing developments.
Due to weakness in UK construction in the last two years, valuations for the suppliers are very undemanding, making investments here particularly attractive. The area least able to respond to significantly higher demand, as well as being the purest play on house building, is brick manufacturing.
Both Ibstock (LSE: IBST) and Forterra (LSE: FORT) could be big winners with smaller, specialist manufacturer Michelmersh (LSE: MBH) also likely to benefit. Elsewhere, any capacity-constrained industry supplying the house builders should also do well.
In aggregates and cement, Breedon (LSE: BREE) is well positioned with sales to both the housing sector and the infrastructure that supports housing. Genuit (LSE: GEN) provides pipes and filtration to the housing sector. While it is higher up the value chain than heavyside materials, its products also don’t travel well and as a local producer, it should benefit.
Finally, equipment will see higher demand, which for a few years at least should lead to greater rental rates benefiting the likes of VP Group (LSE: VP).
Jamie holds shares in Breedon, Forterra and Vistry.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Dividend heroes: the investment trusts that have increased their dividends for 20+ yearsInvestment trusts can be a good option for income-focused investors – but which trusts have consistently increased their dividends over the past 20 years?
-
Six reasons not to top up your state pensionA deadline to buy National Insurance credits and top up your state pension is fast approaching. Here’s why it may not be worth it for some people
-
Why CEOs deserve a pay riseOpinion The CEOs of big companies often come under fire for being grossly overpaid. But the truth, as per some economists, is the opposite. Do they merit a pay rise?
-
Rolls-Royce stock jumps 15% – could it climb further?Aircraft-engine group Rolls-Royce’s CEO has been hailed as a hero for spearheading the firm’s recovery. And the future looks bright, says Matthew Partridge
-
The power of private marketsInterview Helen Steers, co-manager of the Pantheon International investment trust, tells MoneyWeek about the vast array of compelling opportunities in private equity
-
Vertex Pharmaceuticals is an uncommon opportunity in rare diseasesVertex Pharmaceuticals operates in a profitable subsector and is poised for further success
-
Global investors have overlooked these top tips in emerging marketsOpinion Chris Tennant, co-portfolio manager of Fidelity Emerging Markets, picks three attractive companies in emerging markets
-
King Coal has not been dethroned yet — should you buy?The demand for coal is only growing, yet investors don’t seem to want to take advantage of the opportunity, says Rupert Hargreaves
-
It’s time to start buying Europe again, says Merryn Somerset WebbOpinion Europe's stocks are cheap and the economic backdrop is starting to look cheerier, says Merryn Somerset Webb
-
Prosus to buy Just Eat for €4.1 billion as takeaway boom fadesFood-delivery platform Just Eat has been gobbled up by a Dutch rival. Now there could be further consolidation in the sector
