It’s no secret that the UK housing market is recovering strongly, even outside of the already galloping London market.
According to figures from the Office of National Statistics released last month, the average price of a UK home has hit £250,000. The latest numbers from the same body show that private sector house building rose 5% in December, and it was up 21% on a year earlier.
This has naturally been great news for Britain’s listed house builders, which previously saw their shares battered during the financial crisis and the subsequent recession. If you bought shares in almost any house builder two to three years ago and held on, you’ve by now doubled or tripled your money.
Knocking on the FTSE 100’s door
Soaring house prices and a renewed appetite for new homes means more profits for house builders, as well as a higher value put on their chief assets – the land they own.
In turn, that has translated into higher share prices, meaning the shares have recovered from being virtual pariahs of the stock market to seeing more of them knocking on the door of the FTSE 100 club.
Already two house builders – Persimmon and Berkeley Group – reside inside the FTSE 100. Persimmon is the UK’s largest house builder, while Berkeley Group’s valuation has skyrocketed due to its operations being based entirely in London and the South East.
But two other companies from the housing sector have been in contention to join the FTSE 100 in its latest quarterly reshuffle.
A couple of weeks ago, both Barratt Developments (LSE: BDEV) and Taylor Wimpey (LSE: TW) looked neck and neck to make the cut. Each had a similar stock market capitalisation of roughly £4 billion. That placed them on the cusp of automatic entry into the FTSE 100 (which would be achieved by virtue of being ranked 90th or higher in a list of the UK’s 100 biggest public companies).
Since then however Barratt shares have soared while Taylor Wimpey’s shares have struggled to make as much progress, as you can see in the following graph:
One in, one out
Of course, here at the Motley Fool we don’t usually like to over-analyse short-term movements in share prices. But this is a striking divergence if you’ve been watching the shares closely.
Both companies reported excellent numbers in updates to the market in the last week of February. Taylor Wimpey revealed full-year revenues had risen 13.7%, and operating profits up 38.4%. A day later Barratt said revenues were up 33% in the six months to December 31, and profits from operations ahead a whopping 73%.
Sure Barratt’s results outpaced Taylor Wimpey’s, but this reporting window is hardly definitive evidence as to whether one builder is going to be a better hold over the other.
What’s more, expectations are always important in investing. I think in this case the market didn’t just expect good results from the companies – investors were also betting on their FTSE 100 promotion.
Barratt’s results seem to have been sufficiently good to accelerate its move into the FTSE 100, which thus became a self-fulfilling prophecy. In contrast Taylor Wimpey shares fell on the day, despite the seemingly excellent numbers – a move which then weighed on the share price in the days that followed, too, as the chances of it entering the FTSE 100 receded.
Invest in firmer foundations
It all goes to prove how difficult it is to speculate on short-term share price moves.
For what it’s worth, I think it’s only a matter of time before Taylor Wimpey joins its bigger brethren in the league of the UK’s top 100 companies. But I’d prefer to bet on a long-term thesis – that the UK needs more houses built – than to speculate on occasional reshuffles of the index.
