This stock’s bleak short-term future provides a stunning buying opportunity


The company’s vertically integrated business model is likely to help it to overcome an extended period of high inflation.

And since it has £860m in cash, it has sufficient financial resources not only to cope with a period of reduced housing transactions but also to capitalize on falling asset prices via selective purchases of land. This could improve its long-term returns and boost profitability as a housing market recovery ultimately begins.

Indeed, the chances of a perennial decline in house prices and a permanent drop in demand for new homes are minimal.

With housing starts in England averaging 153,000 a year over the past decade, and the country’s population forecast to grow by 190,000 a year to 2030, a supply/demand imbalance that has existed for many decades is showing little sign of drawing to a close.

While mortgage costs are likely to rise further in the short run, interest rates now seem unlikely to reach the extreme levels that have been suggested by some commentators over the past year. House prices have risen at an annualized rate of around 6pc over the past 40 years, during which time interest rates have mostly been significantly higher than they are today, so the long-term outlook for the sector remains upbeat.

Persimmon’s shares have fallen by around 52pc since this column first recommended them in October 2017. While this represents a highly disappointing return, the company’s fundamentals remain sound. As a result, Questor views the stock’s recent decline as an excellent long-term buying opportunity. Indeed, its shares now trade at an even lower price than they did during the depths of the pandemic.

As with any industry downturn, predicting when a nadir and subsequent recovery will take place is a fool’s errand. But the favorable long-term fundamentals of the housing market are unlikely to drastically change even as normalized interest rates.

Since Persimmon has the ability to ride out short-term challenges to benefit from a subsequent recovery and trades on an extremely low valuation, buying it now is likely to produce strong returns in the coming years.

Questor says: buy

Ticker: PSN

Share price at close: £13.74

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