Take a punt on housebuilder Bellway’s solid foundations

Bellway will profit from the shift to remote working, and looks cheap. Matthew Partridge picks the best way to play it.

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. 

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.

Recommended

The charts that matter: China upsets cryptocurrency markets
Global Economy

The charts that matter: China upsets cryptocurrency markets

Bitcoin slid again this week after China declared all cryptocurrency transactions illegal. Here’s what’s happened to the charts that matter most to th…
25 Sep 2021
How to cut your energy bill this winter
Personal finance

How to cut your energy bill this winter

Gas and electricity prices have risen by more than 250% so far this year. And they’re likely to go higher still Saloni Sardana looks at what can you …
24 Sep 2021
Cryptocurrency roundup: China’s crackdown intensifies
Bitcoin & crypto

Cryptocurrency roundup: China’s crackdown intensifies

Most major cryptocurrencies suffered falls this week as China cracked down even harder, while the Evergrande crisis rattled global markets, including …
24 Sep 2021
China Evergrande just missed a bond payment. Does it matter?
China stockmarkets

China Evergrande just missed a bond payment. Does it matter?

Troubled Chinese property giant Evergrande has just missed making an interest payment to some of its bondholders. That's not a surprise, says John Ste…
24 Sep 2021

Most Popular

Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021
A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021