Unlike the US stockmarket, the FTSE All-Share has only partly recovered from its March collapse. It is still in bear market territory (defined by a decline of 20%), down by nearly a quarter from its peak at the start of the year. Many stocks have barely recovered at all from the collapse seven months ago.
While the reason for this poor performance is obvious in some cases, in others low valuations are harder to explain. One company that falls into the latter category is the homebuilding firm Bellway (LSE:BWY), which is still down by more than 40% from the level at which we closed our long position just before the crisis. It has slid by 45% from its peak this year.
Lockdown restrictions hurt developers such as Bellway by both slowing construction and freezing demand, which is why revenue is expected to fall by about a third this year. However, the construction industry is now back to normal, while all the signs suggest demand is also bouncing back.
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
Meanwhile, the pandemic has made remote working more appealing, and the trend will encourage people to consider living further from their offices. There has already been an increase in the number of people who are thinking about moving out of the cities (especially London). If this trend holds up it should be good news for Bellway given that most of its current and future developments are outside the major cities.
Boost from planning changes
In the medium term, Bellway also stands to benefit from changes to planning regulations being implemented by the government. These should make it easier to get approval to build more houses, especially in rural areas and small towns. Of course, the extent of these changes has proved controversial with some MPs, especially those representing seats in the south-east of England, who argue that they go too far. However, since there is a general recognition across the political spectrum that more homes need to be built to meet demand, they are unlikely to be watered down too much.
Given this backdrop, Bellway’s valuation looks even more attractive than when we tipped it last year. The developer trades at just under nine times 2021 earnings and is on a 9% discount to the value of its net assets. This is despite the fact that even if the expected fall in revenue this year materialises, sales will have grown by an annual average of 8% over the past six years, which is a solid track record.
Bellway has managed to use its resources efficiently, with a double-digit return on invested capital (a key gauge of profitability). Bellway also offers an impressive dividend of 4%. I suggest that you revisit Bellway by going long at the current price of 2,360p at £2 per 1p. Set a slightly looser stop-loss than usual at 1,760p, which gives you a potential downside of £1,200.
How my tips have fared
My four long tips have not fared especially well over the past fortnight, with three falling and one unchanged. Royal Dutch Shell’s decision to slash oil and gas production saw its shares fall from 1,078p to 978p, which meant the position was automatically closed out at 1,000p.
Industrial and construction equipment company United Rentals slid from $178 to $176, while cruise operator Carnival Corporation declined from $16.50 to $15.10.
Media group ITV, however, remained at 65p. Overall, counting Royal Dutch Shell, my long positions are making a net profit of £1,022.
My short tips were much more of a mixed bag. Exercise bike manufacturer Peloton increased from $81 to $96, which means you would have closed your position at $90. Online retailer Wayfair rose to $300 from $270.
However, online insurance broker eHealth stayed steady at $75, while electric lorry manufacturer Nikola fell from $35 to $19.30 in the wake of fraud allegations.
Online education provider GSX Techedu appreciated from $91 to $98, although since I suggested that you wait until it falls below $70 before shorting, this won’t have any impact on the overall profit and losses. Counting Peloton, profits on short tips fellto £646.
I now have four long tips (United Rentals, Carnival, ITV and Bellway) and three short ones (eHealth, Wayfair, Nikola and Peloton).
Since United Rentals continues to make a lot of money I’m not going to close it, though I will increase the stop-loss to $155 (from $150).
Given that the price of GSX Techedu is now substantially above the price at which I suggested you should start shorting it, I am close to suggesting that you should simply cancel the position.
-
Who is the richest person in the world?The top five richest people in the world have a combined net worth of $825 billion. Who takes the crown for the richest person in the world?
-
Top 10 stocks with highest growth over past decade - from Nvidia, Microsoft to Netflix, which companies made you the most money?
We reveal the 10 global companies with the biggest returns since 2013. One firm has posted an astonishing 9,870% return, meaning a £1,000 investment would now be worth almost £82,000.
-
It's time to back the yen, says Dominic Frisby
The Japanese yen has been weak for a long time, says Dominic Frisby. That may soon change.
-
What is FX trading?
Tutorials What is FX trading and can you make money from it? Rupert Hargreaves explains how it works and the risks.
-
The Burberry share price looks like a good bet
Tips The Burberry share price could be on the verge of a major upswing as the firm’s profits return to growth.
-
Why you should short this satellite broadband company
Tips With an ill-considered business plan, satellite broadband company AST SpaceMobile is doomed to failure, says Matthew Partridge. Here's how to short the stock.
-
It’s time to sell this stock
Tips Digital Realty’s data-storage business model is moribund, consumed by the rise of cloud computing. Here's how you could short the shares, says Matthew Partridge.
-
Netflix has plenty of life in it yet – here's how to trade the shares
Tips Netflix still has plenty of scope for growth, says Matthew Partridge, and the shares are reasonably priced. Here's how to play the Netflix share price.
-
Trading: Dunelm will keep growing, here's how to play it
Tips Furniture retailer Dunelm surged during the pandemic, but its shares have since fallen back. But it is well placed to take more market share from rivals, says Matthew Partridge. Here, he explains how to play the Dunelm share price.
-
Ashtead – a building equipment rental firm on solid foundations
Tips The prospects for Ashtead, the building-equipment rental firm, are auspicious. Matthew Partridge explains the best way to play the share price.
