Miners and homebuilders have drawn my attention in recent times.
China is taking some necessary steps to sort out part of its problems, while the UK recovery is well under way, which helps boost household confidence and appetite to borrow.
Here are a few names worth keeping on the radar if recent trends persist.
China, Miners, Housebuilders & The FTSE 100
News this week that China had taken action to relax mortgage requirements for second homebuyers is encouraging. I am moderately bullish about China.
If the government there is serious with regard to monetary and fiscal easing, then the mining sector could be just about to turn the corner.
If so, I’d be ready to invest in the FTSE 100, which would greatly benefit from rising valuations for miners, but I wouldn’t bet on BHP Billiton (LSE: BLT) and Anglo American (LSE: AAL), unless they were included in a properly diversified portfolio.
If you feel really brave, you may want to take a look at a couple of homebuilders, of course!
Persimmon & Taylor Wimpey: The Best Of The Lot?
Persimmon (LSE: PSN) has come under pressure in recent weeks, and it looks like investors are taking profits after a six-month rally during which the stock has recorded a +25% performance. By comparison, the FTSE 100 is up only 5% over the period.
Persimmon has lost 6% of value in the last month alone, but its fundamentals and prospects remain intact. While it’s true that the shares of most homebuilders look seriously expensive, Persimmon is one of my favorite stocks in the sector because: a) it offers a generous forward yield at 6%; b) its use of capital is efficient, and returns are incredibly attractive; and c) its trading multiples point to value, and it has a strong balance sheet.
I don’t think that other builders, such as Taylor Wimpey (LSE: TW), are much better than Persimmon, although I’d rather invest in Taylor Wimpey than, for example, in Barratt and Berkeley — both of which are a tad overpriced, in my view.
Taylor Wimpey’s six-month performance reads +38.7%, but its relative valuation remains attractive. Along with Barratt, Taylor Wimpey has been the best performer in the peer group since October: its payout ratio is higher than that of Barratt, however — and its forward yield is also 1.7 percentage points higher than that of its rival!
One caveat is that Taylor Wimpey now trades around the average price target from brokers. So, unless analysts decide to upgrade the stock, Taylor Wimpey may find it more difficult to generate the same kind of returns that it has delivered in recent months.
Do Not Ignore Miners
I am not a big fan of BHP Billiton, and I’d rather invest in Anglo American if I were to add exposure to the mining sector.
BHP is trading some 14% below the average price target from brokers, but bullish estimates suggest upside could be in the region of 40% from its current level.
Of course, BHP could rally if the Chinese economy picks up pace and iron ore prices revert to mean over time. However, I think there is a real risk that BHP may have to trim its payout ratio, which is covered by earnings but is way too high in the current climate, in my view.
Consensus estimates have fallen since July last year, and may continue to fall for some time. Things are less complicated with Anglo American, although neither miner is very safe at present. In fact, Anglo must divest underperforming assets for which market appetite is scarce.
Anglo trades at a meaningful discount against BHP, and that’s one reason why you may want to add 2% of Anglo to your portfolio. Volatile earnings render trading multiples less reliable in this environment, but monetary and fiscal easing measures in China will certainly provide a fillip to undervalued stocks in the sector…
(Incidentally, Antofagasta and Teck Resources denied media reports on Monday, according to which the two companies were in talks to merge. What a pity: M&A is much needed in the mining sector, and this is also what could push up stock prices in the mining space!)
