I’ve been thinking about adding another housebuilder to my ISA holdings. And I’ve had it down to Taylor Wimpey or Barratt Developments (LSE: BDEV) shares.
The big news on 7 February might have made up my mind for me. Barratt has just agreed a deal to take over rival Redrow (LSE: RDW). It’s worth around £2.5bn, and will be paid in new Barratt shares.
When housebuilder shares look cheap, it can be a great time for a takeover to consolidate the business a bit. I wasn’t expecting a deal this big. But it does firm up my belief that there are some cheap stocks in the sector.
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Biggest builder
Barratt is the FTSE 100‘s second biggest housebuilder. But when the new deal goes through, it’ll take stop spot from Taylor Wimpey.
It comes on the day the two firms released their first-half figures. Barratt saw total completions fall 28.5% in the first six months, with revenue down 33.5%. For its part, Redrow recorded a 27% drop in revenue, after completions dipped by 24%.
Both firms did though, talk about a better start to the second half.
Better outlook
Barratt CEO David Thomas said that underlying demand for homes is strong. He added: “Since the start of January, we have seen early signs of improvement in both reservation rates and buyer sentiment, helped by expectations of lower interest rates and the introduction of more competitive mortgage rates.“
What do I think of all this? A quote by Warren Buffett comes to mind. He once said that “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”
Right now, it looks to me like that gold takes the form of cheap shares. And for me it’s mainly banks and housebuilders that look super cheap.
Should we buy?
Barratt’s sure got the washtubs out. But should we do the same?
Well, it’ll take a while for the market to settle and for us to get a handle on the value of the new combined stock. At the time of writing on the day of the news, Barratt shares are down 8%, but Redrow’s are up 13%.
Forecasts showed good dividend yields. But again, we’ll need to see how the dust settles and what the City thinks.
It takes courage to make such a big move when a sector’s under pressure like this. And it can also take courage for private investors to buy shares in these companies too.
Beat the risk
We might see hopes of interest rate falls. But the Bank of England still seems very wary, and fears a late rise in inflation this year. So I expect a fair bit of volatility in the sector for a while yet.
But I think investors with a long-term view could do well to follow the lead of Barratt, and consider snapping up housebuilder stocks while they’re cheap.
