Housebuilding stocks have been significantly affected due to the coronavirus pandemic. This has led to building sites being shut down, dividends being cut, and estate agents closed. Nevertheless, with the construction sector restarting over the past couple of weeks, I believe housebuilding stocks now look drastically underpriced. This is despite housing demand remaining strong and large numbers of first-time buyers searching for cheap options.
Even so, with some estimates predicting a 37% fall in housing sales for this year, the housing sector is still on perilous ground. This means that not all housebuilding stocks will recover as fully as others. For this reason, it is important to be discerning when choosing the best housebuilders.
I believe that these two FTSE 250 companies are in the best position for the recovery.
A five-star housebuilding stock The first FTSE 250 company that stands out is Bellway (LSE: LON:BWY). Bellway is the fourth largest housebuilding stock in the UK and has consistently received excellent consumer satisfaction. In fact, over 90% of its customers state that they would recommend it to a friend. This has resulted in a strong order book of approximately c.£1.6 billion. Consequently, the housebuilder is in an excellent position once housing sales start to increase again.
Bellway also has a flawless balance sheet, which includes more cash than debt. This will ensure that Bellway is in a strong position to deal with the impacts of coronavirus and will be able to spend cash where necessary.
A housebuilder with significant insider buying Another FTSE 250 housebuilder that is especially appealing is Vistry Group (LSE: VTY). Vistry (previously Bovis Homes (LON:VTYV)) has been the worst affected housebuilding stock over the past couple of months, with a c.45% year-to-date drop.
Although this may be worrying, this underperformance may be due to the acquisition of Linden Homes for c.£1.1 billion just before the crisis. This has led to worries over Vistry’s liquidity. Nevertheless, this acquisition has established Vistry as a leading housebuilder and this should result in benefits in the near future.
One particular aspect that attracts me to Vistry stock is the amount of insider buying. Since the start of March, nearly 100,000 Vistry shares have been bought by seven different insiders. As Peter Lynch has said, “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” This insider buying is a strong sign of faith in the recent acquisition and the future of the company.
The FTSE 250 housebuilder has also noted that traffic to its website has remained strong throughout the pandemic and this is “an indication of the continued underlying demand”. The recent £58 million deal to build 200 homes in Exeter is an example of the demand that still exists and how Vistry ought to profit from it.
To conclude, I believe that these two cheap FTSE 250 housebuilding stocks offer excellent value and significant potential for the future. Whilst I can also see significant potential in other housebuilding stocks (such as Taylor Wimpey (LON:TW) and Persimmon (LON:PSN)), I think that Bellway and Vistry are the two housebuilding stocks best placed for the recovery.
The post Housebuilding stocks are underpriced: these cheap FTSE 250 shares are my top picks appeared first on The Motley Fool UK.
Stuart Blair owns shares in Vistry Group and Bellway. 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.
Motley Fool UK 2020