There are things about Taylor Wimpey (LSE: TW) shares that fall into the category of common knowledge. For example, we know the underlying housebuilding business and the shares are cyclical. And that presents investors with both opportunities and threats.
Decline in earnings ahead
We also know the company has enjoyed a multi-year period of bumper profits. And we know that City analysts are forecasting a decline in earnings of around 35% for 2023.
And finally, there’s the share price action. Since peaking just above 230p in February 2020, the recent price, near 103p, is around 55% lower. And that move speaks volumes about the risks and timing difficulties faced by investors attracted to the stock. Indeed, the grind lower has caused the price to fall by about 34% over the last 12 months.
So why should I bother trying to pick the bottom of the down-move in the hope business operations will recover? To answer that question, I’d point to the long upward trend in operations and the stock price following the general economic crash in 2007/08.
The shares hit their nadir around November 2008 when the price plunged to just below 5p. And given today’s 103p, the extent of the fall was astonishing. Indeed, in 2007, the stock peaked well above 300p. But it’s what happened next that keeps me interested in Taylor Wimpey.
After hitting that low single-digit figure, the stock began a long uptrend with the price reaching around 160p seven years later. And the move was driven by solid operational progress and rising profits in the underlying business.
If I’d bought Taylor Wimpey shares in 2008 at 5p and sold in 2015 at 160p my return would have been a whopping 3,100%. And that’s on capital appreciation from the share price alone. On top of that, the company paid some decent dividends along the way.
Timing is everything
It’s clear that cyclical businesses sometimes have the potential to deliver investor returns that would put some of the raciest growth companies to shame. But that potential needs to be balanced against the possibility of a cyclical stock whipping cash away from its shareholders at an alarming rate. For example, if I’d been holding Taylor Wimpey before the credit crunch and Great Recession, I’d probably still be underwater with my investment even now.
Timing is everything with cyclicals. So what about Taylor Wimpey shares right now? As always, it’s difficult to judge. The share price and profits have fallen. But the balance sheet is strong and the valuation looks undemanding. Therefore, the current situation could represent the extent of the current down-leg in the cycle — but it may not.
On 9 November, chief executive Jennie Daly said the business is “performing well” despite the “challenging” economic and political backdrop. However, it’s possible for conditions in the sector to deteriorate.
Meanwhile, the share price has bounced a little from its recent low. Could this signal a change in the trend — maybe. And if I had spare cash I’d be tempted to buy the stock now. However, I’d remain cautious and prepared to exit my position at short notice.
Kevin Godbold has no position in any of the shares mentioned. 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 2022