These 2 stocks yield 10% and look unmissable bargains if we get a soft Brexit

Harvey Jones says cheap valuations and sky-high yields make the UK housebuilding sector too tempting to ignore.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The housebuilding sector was hit harder than most by the shock 2016 EU referendum result, and investors have been treating it with suspicion ever since.

House of horrors

They fear that if Brexit goes badly wrong, this key domestic-focused sector will take a massive hit. Other concerns include the high cost of housing squeezing out young buyers, and the sector’s resulting dependence on the Government-backed Help to Buy scheme for new builds, although this has now been extended to 2023.

The result is that many house-builders have been trading at rock bottom valuations while offering outsize yields. For example, Barratt Developments was recently yielding 7.9%, while trading at just 7.7 times earnings. Taylor Wimpey has been yielding 13.1%. 

Mortar to come

Two other builders, Bovis Homes Group (LSE: BVS) and Persimmon (LSE: PSN), have similarly low valuations and even higher yields. I have been bigging them up for months and sentiment now seems to be swinging in their favour.

FTSE 250-listed Bovis is up 14% over the last month, while FTSE 100 stalwart Persimmon is up 23%. Investors have been encouraged by a number of factors, including Bank of America Merrill Lynch upgrading the sector after saying risks are now priced in, while there’s a general feeling that the likelihood of a cliff-edge, no-deal Brexit is beginning to fade.

Income heroes

Now investors feel a little freer to look at their underlying attractions – high dividends, low valuations – rather than panicking about the macro threats out there. In a further boost, both Bovis and Persimmon posted robust sets of figures this week. 

Bovis said full-year profits were slightly ahead of consensus with increased sales and improved margins, and lifted its final ordinary dividend 17% to 38p.

Building bricks

Persimmon’s recent trading update showed a 4% rise in total revenues and completions, although average selling prices rose just 1%. The housebuilder also reported continued customer demand helped by high employment levels and competitive mortgage rates.

Naturally, there are still risks and the biggest, of course, is Brexit. What happens next is anybody’s guess. But if we do crash out of the EU that could plunge housebuilders into extreme volatility. So bear that in mind, although this applies to many other investments, too.

Value plays

Given the jump in both stocks in the past month, some may wonder if they’ve missed out on a buying opportunity. To a degree, the answer is yes. However, Bovis still trades at just 8.8 times forecast earnings, helped by a forecast 46% leap in earnings for 2018. It now offers a whopping forecast yield of 11%, followed by 10.7% and 10.9% over the next two respective years, which looks too good to resist if you expect a soft Brexit.

Similarly, Persimmon trades as a forecast P/E of 7.9 with a whopping forecast yield of 10.7% for each of the next three years. City analysts are forecasting a small drop in earnings over the next couple of years, so it isn’t all plain sailing. This aside, both stocks still look excellent value right now. Unless our politicians completely bungle Brexit. Surely they’re not that useless, are they?

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »