As a veteran value investor, I’m constantly searching for bargains. My favourite screen is to trawl the FTSE 100 and FTSE 250 for shares trading on low ratings that also offer decent cash dividends.
Ideally, I’m after established companies with simple business models and competent management teams. And I have a particular interest in ‘fallen angels’ — companies with depressed share prices that might be recovery plays.
A FTSE 250 faller
In my latest search for undervalued shares, I came across Crest Nicholson Holdings (LSE: CRST). Crest Nicholson’s stock popped up for two reasons. First, for being lowly rated; second, for offering a very high dividend yield.
However, I was wary of running the numbers for this particular share, because Crest Nicholson is a UK housebuilder. Alas, the worst-performing stock in my family portfolio over the past year has been a larger rival firm — hence my initial wariness.
Another reason for my hesitancy was that Crest Nicholson stock has been a flop over multiple timeframes. Here’s how the shares have performed over seven different periods:
| Current share price | 225.38p |
| One day | -3.7% |
| Five days | -10.2% |
| One month | -14.3% |
| Year to date | -4.7% |
| Six months | -1.6% |
| One year | -11.6% |
| Five years | -46.3% |
Over all seven timescales, ranging from one day to five years, this stock has lost value. Indeed, it has almost halved over the past half-decade, a period during which the FTSE 250 lost only 8.7%.
However, the above figures exclude dividends, which are a core component of returns from UK housebuilders’ shares.
This appears to be a value stock
Looking at Crest Nicholson’s fundamentals, I can see why some investors are keen on this stock. On the surface, the shares look undervalued on two levels.
First, this share trades on a lowly price-to-earnings ratio of 6.5, which translates into an earnings yield of 15.4%. That’s a considerable discount to the FTSE 250’s earnings multiple.
Second, it offers a market-beating dividend yield of 7.5% a year. That’s way ahead of the FTSE 250’s yearly cash yield of around 3.4%. What’s more, Crest Nicholson’s cash payout is covered twice by historic earnings, which is some comfort.
Now for the bad news
Another potential value indicator is that this stock is trading much closer to its 52-week low of 170.5p than to its 52-week high of 293.6p. Then again, this might be a reflection of future weakness or current uncertainty.
One thing is for sure: UK house prices are sliding. At the end of May, the average property price was 1% lower than at end-May 2022. This was the first yearly fall in prices since December 2012. That can hardly be good news for sellers of homes, right?
Also, UK mortgage rates have soared since 2021, lifting mortgage payments and making homes less affordable. Today, yields on gilts (UK government bonds) soared to highs exceeding those seen during the ‘mini-Budget’ crisis of September 2022.
As a result, it won’t be long before the average five-year, fixed-rate mortgage is priced above 6% a year. This would be a huge blow for homebuyers and borrowers coming off much cheaper fixed rates.
In summary, given the growing risks of a house-price crash, I will steer clear of this FTSE 250 stock for now. But if it keeps getting cheaper, then who knows?
