It’s not always easy to tell the difference between bargain buys and shares that deserve to be cheap. The two stocks I’m going to look at today provide us with an example of both.
An 8% yield to take home?
Housebuilding stocks divide opinion. Some investors fear that we’re on the cusp of a housing market slump, especially in the event of a no-deal Brexit.
Despite these risks, it’s worth noting that low interest rates and high levels of employment are generally seen as supportive for the housing market. Strong demand from the rental sector is also a positive.
Should you invest £1,000 in Centrica right now?
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FTSE 100 firm Barratt Developments (LSE: BDEV) is one of my top picks in this sector. The company recently said that housing completions rose by 4.1% to 7,622 homes during the six months to 31 December. Pre-tax profit for the period rose 19.1% to £408m, thanks to higher profit margins.
The company ended the period with net cash of £388m and expects this total to reach more than £600m by the end of June. Much of this will be returned to shareholders through the firm’s dividend, with additional £175m returns planned for 2019 and 2020.
At current levels, the shares trade on 8.3 times forecast earnings with a dividend yield of 7.8% for the current year. This high yield includes the £175m return I mentioned above — without this, the yield would be about 5%.
If the housing market remains stable, Barratt’s valuation looks like a buy to me. It’s not without risk, but I believe this business is fundamentally sound and should reward long-term investors.
This could be the end
One company I feel much less confident about is FTSE 250 pharmaceutical firm Indivior (LSE: INDV). Shares in this addiction treatment specialist have fallen by nearly 80% since June 2018.
The reason for this collapse is that a rival firm is now very close to gaining approval to sell a generic alternative to Indivior’s main product, Suboxone Film. This is used to treat opioid addiction, mainly in the US market.
Indivior’s lawyers have been fighting a running battle to prevent this for several years. But the commentary in today’s results suggests chief executive Shaun Thaxter is preparing for a final defeat which could come later this month.
Thaxter says the company has been cutting headcount, hoarding cash, and has prepared its own generic version of Suboxone Film. This will be launched if generic rivals are given the green light.
Sales could fall by 80%
In 2018, Indivior generated net revenue of $1,005m. Almost all of this came from Suboxone. The firm’s only other commercial product, Sublocade, generated revenue of just $12m.
Generic products sell at much lower prices than patent-protected branded medicines. Indivior expects its generic product to generate revenue of only “tens of US $ millions.” Sales of the more expensive branded product would almost disappear.
Sales of new product Sublocade are expected to rise to $50m-$70m in 2019. Based on this guidance, I estimate that Indivior’s core revenue could fall by 80% to as little as $200m in 2019.
This is probably a worst-case scenario, but it seems to me that the group’s £791m market-cap is almost certainly too high. In my view, buying the shares at current levels is little more than a gamble. I see this as a stock to avoid.
