Why I’d dump Persimmon plc and buy this ‘expensive’ stock instead

G A Chester discusses why he’d sell Persimmon plc (LON:PSN) and one stock he’d buy.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Housebuilders have been one of the great investment plays since the 2008/09 recession, delivering huge rises in share prices and masses of dividends. However, housebuilding is a highly cyclical boom-and-bust industry and current valuations suggest to me that it’s time to be fearful when others are greedy.

The table below shows some data at annual results dates for FTSE 100 housebuilder Persimmon (LSE: PSN) going back to the years before the last crash.

  Market cap (£bn) Book value (£bn) Net profit (£m) P/B P/E Operating margin (%) Share price (p)
27/2/2017 6.26 2.74 625 2.3 10.0 25 2,030
23/2/2016 6.24 2.46 522 2.5 12.0 22 2,029
24/2/2015 5.06 2.19 372 2.3 13.6 18 1,650
25/2/2014 4.46 2.05 257 2.2 17.4 16 1,463
25/2/2013 2.72 1.99 170 1.4 16.0 13 898
28/2/2012 2.13 1.84 109 1.2 19.5 10 705
01/3/2011 1.36 1.74 115 0.8 11.8 8 452
02/3/2010 1.28 1.62 74 0.8 17.3 4 424
03/3/2009 1.13 1.56 (625) 0.7 n/a 11 375
26/2/2008 2.28 2.35 414 1.0 5.5 22 760
26/2/2007 4.41 1.84 396 2.4 11.1 21 1,473
27/2/2006 4.17 1.69 345 2.5 12.1 23 1,416

As you can see, before the last housing crash, Persimmon was posting record profits, operating margins were in the cyclically high 20s and P/Es were temptingly ‘undemanding’. But the share price had almost halved, even as it was reporting a record net profit of £414m in February 2008. And halved again by the time it reported a £625m loss a year later.

As you can also see, the ideal time in the cycle to buy is when operating margins and profits are depressed, P/Es are high (or off the scale, as at the time of the £625m loss) and P/Bs are below one, indicating a discount to net assets.

However, we’re now back to top-of-the-cycle operating margins in the 20s, record profits, undemanding P/Es but high P/Bs. In fact, at today’s share price of 2,800p and incorporating H1 numbers, the operating margin is 28% and the P/B is 3.2 — unprecedented highs.

I don’t believe “it’s different this time.” And with UK personal borrowing at its highest level in history, interest rates set to rise, and house prices already falling in London, I see substantial downside risk. As such, I think the time has come to switch to rating Persimmon a ‘sell’.

Lok a stock I’d buy

I’m more optimistic about the valuation and prospects of UK self-storage specialist Lok’n Store (LSE: LOK), which released results today for its financial year ended 31 July. The shares are up 2% at 370p, giving this AIM-listed company a market cap of £108.5m. With the company having posted a net profit of £3.1m, the P/E is 35 and an 11% increase in the dividend gives a yield of 2.7%. Meanwhile, its book value at year-end was £89.1m, so the P/B is 1.2 — or 1.1, adjusting for the fair value of the leasehold portion of its property estate.

Lok’n Store’s self-storage facilities are used by household and business customers. It also has a revenue stream from serviced archive and records management and an income from managing self-storage units for third parties. It reckons the attractive dynamics in its market include being “resilient through economic downturns.” It said today that its expanded new store pipeline will add 45% more space over the coming years. It added that this creates “a strong platform for an exciting period of rapid growth.”

Based on its modest P/B and prospects of “rapid growth” (including growth in book value), I rate Lok’n Store a ‘buy’.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »