Neil Woodford has been highly active in buying and selling stocks during 2017. Indeed, it's many a long year since his funds have undergone such a dramatic shift. Old favourites, such as GlaxoSmithKline and British American Tobacco, have been sold to help fund a major move into UK domestic cyclical stocks. And this is also where much of the £553m raised for the new Income Focus fund he launched this year has gone.
Banking on Britain
Woodford's shift has been "designed to capture a contrarian opportunity that has emerged in domestic cyclical companies where valuations are too low and future growth expectations far too modest."
Banking is central to Woodford's thesis about growth expectations. Up until this year, he maintained that the reason banks weren't lending was simply because they didn't have enough capital. He now believes they do and reckons they're well placed to increase both lending and dividends for shareholders.
Pariah no more
Woodford has built up a big stake in Lloyds this year but revealed just a few days ago that he's also been buying shares in Royal Bank of Scotland(LSE: RBS) and Barclays. The Scottish bank remains a pariah for a lot of investors but Woodford sees bright prospects, due to many of the reasons discussed recently by my Foolish colleague Rupert Hargreaves.
At a current price of 275p, RBS trades on a cheap forecast 2018 price-to-earnings (P/E) ratio of 10.6, with City analysts also expecting a 3.3% dividend yield. Personally, I'm not convinced that the time is ripe to invest in the still-70%-state-owned bank. However, confidence is on the rise judging by only four brokers currently rating the stock a 'sell' compared with 11 this time last year.
Strong industry fundamentals
Housebuilders are another of Woodford's major plays on the UK domestic economy. FTSE 100 giants Taylor Wimpey and Barratt Developments feature prominently but there's a host of others, including mid-cap Bovis Homes(LSE: BVS), which released a trading update today.
On the broad backdrop for housebuilding, Bovis said: "The demand for new homes continues to be robust across all our regions and customer interest remains good. The industry fundamentals are strong given the Government's housing policy, in particular Help to Buy, the low interest rate environment, and the competitive mortgage market."
On Bovis's own performance, management reported "strong sales,""a high level of customer satisfaction" and that "initiatives to simplify and streamline our operating structure to reduce costs and make us more agile, are progressing well."
As a result, the board said it's confident of delivering on profit expectations this year and "a significant improvement in profits for FY 2018." At a current share price of 1,120p, the forecast 2018 P/E is 12.4, while dividend forecasts imply a whopping yield of 8.4%.
Of course, Woodford's big bet on banks, housebuilders and other domestic stocks rests to a large degree on a sanguine view of Brexit. He and his team see "considerable grounds for optimism that the long-term outcomes for the UK economy will be far better than the alarmed consensus would suggest."
Naturally, Brexit is one of the market's major preoccupations, as there are all sorts of potential implications for different industries and companies.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Barclays. 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.