Yesterday saw the bulls firmly back in charge with the FTSE 100 finishing more than 2% higher. Is this the start of another sustained run of increasing prices, or merely a brief period of calm before another storm? My gut feeling is the latter. No one knows for sure, of course.
That said, if this really is one final end-of-cycle bounce, there are arguably a number of companies that I think are best avoided for now. Despite today’s impressive interim results, I include FTSE 100 stock Barratt Developments (LSE: BDEV) among these.
Can’t fault these numbers
Total completions rose 4.1% to 7,622 over the six months to the end of 2018 at Britain’s largest house-builder. Revenue climbed an impressive 7.2% to £2.13bn and pre-tax profit jumped a little over 19% to £408m.
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Even Barratt’s already-high returns on capital employed (ROCE) — a metric often used by investors to ascertain a company’s quality — rose to 29.5%.
Encouragingly, current trading is in line with management expectations which is “confident of delivering a good financial and operational performance in FY19.” At £3.021bn, total forward sales are 7.3% higher than at the same time last year.
Taking all this into account, it’s not surprising that shares were almost 4% higher this morning.
Still cheap
On paper, buying shares in a company like Barratt looks a no-brainer. Trading on just eight times expected earnings before this morning, the stock appears mouth-wateringly cheap, even more so when the well-covered cash returns to shareholders are considered.
In addition to hiking the interim payout 11.6% to 9.6p per share today, the company also revealed plans to give back £175m in November and £175m in 2020 by way of special dividends. That’s a sign of confidence if I ever saw one.
On top of this, the company’s balance sheet is in fine order and boasted a net cash position of £387.7m at the end of December — almost 138% more than at the end of 2017.
Brexit risk
Nevertheless, I remain wary. A quick look at the behaviour of its share price towards the end of last year gives an indication of how quickly market participants can turn against companies like Barratt, regardless of how effectively they’re run.
The stock dived 20% between mid-November and mid-December, largely as a result of concerns over Brexit. Since we’re still no closer to learning the manner of our departure from the EU, there’s certainly no guarantee that similar falls won’t occur in the near future. Indeed, the company has acknowledged that there are a number of risks ahead which could impact performance and “cause actual results and shareholder returns to differ materially from expected and historical results.“
Regardless of how good a business is and how cheap its shares are, talk like that shouldn’t be overlooked by prospective owners.
Bottom line
Whether the UK’s housebuilders really do represent great value or not at the current time is a contentious subject. My Foolish colleague Alan Oscroft, for example, finds their low valuations impossible to justify.
Notwithstanding this — and Warren Buffett’s advice that it’s usually a good idea to “be greedy when others are fearful” — I’m still of the opinion that now is not the time to be buying this kind of stock.
If patience isn’t your strong point, however, be sure to check that the rest of your portfolio is suitably diversified before jumping in.
