Why I’d buy into rising Taylor Wimpey and Barratt share prices today

Models of houses on top of pound coins

There’s been a fair bit of bad news floating round the housing market, and Thursday has brought us more.

Members of the Royal Institution of Chartered Surveyors, in their gloomiest mood for 20 years, now expect house sales to fall in the next three months. It’s mainly down to the Brexit fiasco — but we already knew that, didn’t we?

And there’s one snippet of good news — they also put it partly down to a lack of supply, which sounds positive for house-builders to me.

When I last looked at Barratt Developments(LSE: BDEV) in December, my take was tha yes, everyone knew that Brexit was likely to affect the housing market in the short term. But I reckoned that share prices had fallen way beyond what was needed to compensate for it and that they were just too cheap.

Price gain

Since I aired that opinion, the Barratt price has since recovered by an impressive 19%. But before you’re impressed by my timing expertise, I must explain that I use the ‘stopped clock’ approach — my timing is usually wrong, but I occasionally get it right purely by accident.

It’s valuation that matters to me, not timing, and I just want to find undervalued shares and don’t care whether I hit the absolute bottom. And on that score, I still think Barratt shares are cheap on a forward P/E of 7.5 (only about half the FTSE 100 long-term average) and forecast to deliver dividend yields of around 9%.

Barratt reported record profits in 2018 and, despite the darkening housing market feelings, City analysts expect the next two years to be flat in terms of earnings. And if that’s the worst that’s likely to happen, I’m surprised investors aren’t snapping up more shares.

Across the sector

The picture is pretty much the same at Taylor Wimpey(LSE: TW). Since a low on 10 December, the shares have climbed by 25%. So maybe we’re in a period of price correction, and investors are recognising that Brexit (however badly it goes) won’t stop the long-term housing shortage that will surely keep demand for new homes going.

Another possibility is that since it became clear that Theresa May’s Brexit agreement didn’t stand a chance of making it through parliament, investors are being buoyed by rising hopes that our exit from the EU is going to be either significantly delayed or halted altogether.

I’d like a halt myself. But whatever the cause of the changing sentiment, it’s rational long-term stock valuations that count.

Bigger dividends

Taylor Wimpey shares are similarly valued to Barratt’s, but in this case we’re looking at forecast dividends in excess of 11%. Earnings are, again, expected to remain roughly level for the next two years, but I think they should be good enough to keep the dividends covered.

Ahead of full-year results, Taylor Wimpey has reported “another year of strong performance.” The firm has also reiterated its guidance for 2019, adding that it sees “significant volume growth potential for 2020 onwards.”

Would I buy Barratt or Wimpey shares? Yes. Why haven’t I bought any yet? Simply because I recently went for Persimmon, whose shares have followed a similar 2019 trajectory.

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Alan Oscroft owns shares of Persimmon. 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.

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