The Persimmon (LSE:PSN) share price climbed 18.6% in July, making it the best-performing FTSE 100 stock last month. Despite this, the shares are still 50% down from their pre-Covid-19 levels.
It’s therefore natural to wonder whether there might be a buying opportunity here. After a long period in the wilderness, is it time for the stock to bounce back?
Housing boom?
The biggest reason Persimmon shares soared last month is the change in the UK government. The Labour Party has made big promises to build more houses and get people onto the property ladder.
That’s good for housebuilders in general, not just Persimmon. Taylor Wimpey, Barratt Developments, and The Berkeley Group all saw their share prices jump by more than 10%.
None was up as much as Persimmon though. That’s partly because they weren’t down as much in the first place, but the market clearly seems to think the company has more to gain than its rivals.
Yet I’m somewhat sceptical. I’m staying away from the UK housebuilding sector at the moment – and if I was to invest in this space, this isn’t the stock I’d be looking to buy.
Average selling price
One of the things that differentiates Persimmon from its rivals is its average selling price. At £255,756, it’s lower than Taylor Wimpey (£356,000) and Barratt Developments (£307,000).
This is partly why the company might have more to gain from Labour’s policies. As more people become homeowners/tenants, demand for relatively cheap housing is likely to increase.
The downside is this makes the business vulnerable when support gets withdrawn. High exposure to the Help to Buy scheme meant Persimmon was hit hard when it was discontinued.
I’m not convinced a near-term benefit from government initiatives is enough to justify buying the stock for a long-term investment. And I’m not actually sure about the short-term bit, either…
Balance sheet
Another big issue with Persimmon is its financial position. It’s investing for growth, but this looks likely to put the business in a position where it has more debt than cash on its balance sheet.
In theory, there’s nothing wrong with that. But it’s worth noting that neither Barratt nor Taylor Wimpey is anticipating being in this position in the near future.
That means Persimmon’s rivals are likely to be in a stronger position financially if and when the new government schemes roll out. And this might put the company at a competitive disadvantage.
I’m not convinced the firm has the most to gain from a surge in housebuilding. If that’s the main reason to buy the stock at the moment, then I’ll leave this one for others.
The elephant in the room
Persimmon isn’t on my list of FTSE 100 housebuilders to consider buying. Right now, though, I actually have reservations about the whole lot.
All of the major builders are under investigation from the Competition and Markets Authority for potential collusion. I’ve no idea what the outcome of this will be – and that’s a big risk.
Maybe it will be nothing, but I’ve no way to know that and the prospect of unspecified liabilities is enough to put me off. That’s especially true when I think there are better opportunities elsewhere.
