As a holder of Persimmon (LSE: PSN) shares, I can’t say that the last few months have been easy. Indeed, market conditions have been so brutal that the York-based developer has now been ejected from the FTSE 100.
Is there any chance that the shares might rally when a trading update arrives next month?
Sluggish market
Initial impressions suggest not. Right now, Persimmon faces a number of significant headwinds that show no sign of weakening.
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Perhaps the most obvious of these is the threat that interest rates may stay higher for longer than previously thought. This is certainly possible given that the last inflation reading itself came in slightly higher than expected. The next base rate meeting falls on 2 November.
Regardless of what happens then, I think most will agree that the numbers on Persimmon’s latest statement are likely to be poor. Ominously, peer Barratt Developments already warned in October that forward sales have slowed dramatically due to a far more restrictive mortgage market. The end of Help to Buy, a government scheme set up to support first-time buyers, isn’t helping matters.
In such an environment, news that UK house prices fell at the fastest annual rate in 14 years last month isn’t all that surprising. In response, Persimmon shares recently set a fresh 52-week low.
Down, not out
As bleak as things might seem, I maintain there are at least a few chinks of light for Persimmon holders like me.
First, none of the above is unknown. By this, I mean that nearly every market participant and their dog is surely aware of just how low expectations are for the UK economy in general and this sector in particular.
As a general rule of thumb, this should mean that the risk/reward trade-off is increasingly in my favour. In the topsy-turvy world of the stock market, it tends to be when investors are at their most bearish that risk is lowest.
Strong balance sheet
Second, I still firmly believe that Persimmon has the financial firepower to get through this period, especially after cutting the dividend earlier in 2023. Now, I like receiving income as much as the next person. However, a temporary interruption is manageable if one has remembered to stay diversified (and I have!).
Naturally, another cut can’t be ruled out. However, the 6.1% forecast yield is currently expected to be covered roughly 1.4 times by profit. Obviously, any change to this as a result of November’s statement and confidence would be hit (again).
Growth driver
Third, the ongoing shortage of quality housing in the UK means that the company still has the potential to perform (very) well for investors over the long term. This is particularly the case if the government introduces a replacement to Help to Buy.
In fact, I can see the sector becoming something of a political football as we move into 2024 and parties begin outlining how they will support the market if elected. This might end up working in Persimmon’s favour.
Sitting tight
For now, however, I’m content to sit tight and wait for the statement on 7 November. I don’t expect to like what I read but I’m not contemplating selling.
This is ‘grin and bear it’ investing at its finest. Where’s my hard hat?
