’tis the season of bringing out profit warnings, and hoping that everyone is too busy cramming down the Quality Streets to notice.
Housebuilder BVS (Bovis) certainly seems to have adhered to this line of reasoning when it made, I think unscheduled, pre-close statement today. The killer phrase was:
We expect the volume delivery for 2016 will be lower than previously anticipated
At the time of writing, shares are down 5% to 813p. Later on in the RNS, things seems to be much more positive though:
The average sales price of the homes legally completing in 2016 is expected to increase by around 10% (2015: £231,600), driven by improved mix and increased underlying market pricing.
It even expects to sell more houses next year:
he Group is expecting to hold around 900 private forward sales at the start of 2017 (2016: 841)
It sounds pretty good to me.
It seems that the market is growing increasingly suspicious of the housing market. BVS has a RS1y (rel str 1 yr) of -24%, with similar amounts for the rest of the sector.
The tricky bit about the housing market is that the sector has had a very good run over the last 5 years, but has been faltering over the last year. This is exactly the opposite of what’s happened in commodities.
We see, for example, that BWY (Bellway), trade at a PE of 7.2. Either that’s excellent value, or a trap. One should be very suspicious of cyclicals trading at low PEs. In the words of Peter Lynch:
Buying a cyclical after several years of record earnings and when the P/E ratio has hit a low point is a proven method for losing half your money in a short period of time.
BWY, for example, has a ROE of 20.7%, not far away from its decade high of 21.3%. Compare that to its decade low: 2.1%.
This pattern looks common with the housebuilders. TW. (Taylor Wimpey): ROE now is 17.8% (actually the highest it’s been in a decade), compared with a low of -7.3%.
It’s these factors that caused me to sell out of my one housebuilder during the year. I could be wrong, of course, BVS seems to be optimistic, but the signs (high 5-year share price performance, negative 1-year, ROEs near historic highs, low PEs) of a trap have me too worried to invest in this sector.
Stay safe out there.