The last time the housing sector was in the gutter, Persimmon (LSE: PSN) shares rose 2,638% (including reinvested dividends) in around 13 years.
The last downturn was over 10 years ago during the housing crash of 2008. With a similarly troubled – if less severe – housing market today, could now be a once-in-a-decade chance to pick up cheap shares? Let’s find out.
Bargains
To start with, it’s important to know that housebuilders are subject to various factors they have no control over. Things like mortgage costs, the economy, supply costs, and government assistance all are out of the hands of these companies yet impact their top and bottom lines.
The result is these companies tend to have boom and bust periods. While these cycles aren’t great for those looking for stable investments, they can throw up a bargain or too.
For example, between 2006 and 2008, Persimmon shares fell from £14.88 to £2.16 – a total drop of 86%. Was the company badly managed for a couple of years? No. The stock crashed like every other housing stock.
Anyone who bought in at the bottom would have enjoyed a decade of share growth and big dividends as the housing market recovered (aided by government intervention like the Help to Buy scheme). Total returns from low to high were a staggering 27 times.
Best buy
Is it a similar story today? Well, thankfully, the scale of the crisis is nothing like 2008. However, housebuilders are still struggling. Inflation has increased building costs, interest rates have increased mortgage financing and the government has withdrawn many support schemes for homebuyers.
I’ll mention here that I hold Persimmon shares already. I believe the housing market is underpriced and Persimmon is perhaps the best buy for the recovery.
The first reason is Persimmon sells the cheapest homes. Its average house went for £256k in 2023, around 20% lower than the sector average. With a cost-of-living crisis showing no signs of abating, I expect prospective homebuyers to look towards cheaper options.
Second, Persimmon has consistently achieved higher operating margins than its competition. High margins show a company is managed well and invests smartly. An operation margin in the last full year of 27.2% compares well to Taylor Wimpey at 20.9% and Barratt Developments at 20%.
I also believe that with our population projected to continue increasing that demand for housing will rise too. This is one reason for Persimmon’s previous good run.
On balance
Lastly, I believe that shares look underpriced. They’re down around 55% from a 2021 high.
In terms of risks, macroeconomic factors will play a huge role. Any number of a weak economy, prolonged high interest rates, continuing high inflation and cost of living issues could make a possible rebound in the sector unlikely.
On balance, I think this is a good opportunity to consider buying cheap shares. Will we look back at it as a once-in-a-decade opportunity one day? I hope so.
