UK Markets open in 4 hrs 15 mins

This FTSE 100 share price has fallen by over 33%. I’m buying and here’s why

Andy Ross
A house being constructed in the countryside

Housebuilders may not be the most obvious companies to buy during a bear market. Even FTSE 100 companies in the sector, with solid balance sheets, have seen their share prices fall.

Banks are reining-in mortgage lending and people aren’t willing to go on house viewings during a global pandemic. However, as Warren Buffett says, it’s best to be greedy when others are fearful. I think this nicely sums up why now could actually be a good time to invest in what I think is one of the sector’s best companies, Persimmon (LSE: PSN).  

The bad news first

Like many other companies, Persimmon is facing a lot of uncertainty from coronavirus. Therefore, it’s not at all surprising that the dividend has been suspended. This is an action many management teams are having to take.

But I think the action is prudent and doesn’t indicate any particular cause for concern. Indeed, the housebuilder has a lot of cash in the bank.

However, given Persimmon was a high-yielding share before the crisis, the loss of the dividend will hurt a lot of investors looking for income. I expect as soon as it’s sensible and conditions normalise, management will be keen to start paying out investors again.

Persimmon has also unsurprisingly taken the step of shutting down sites and maintaining only essential work. That may have an impact on how many houses are sold even a little while after restrictions are lifted as the firm deals with a backlog of building. 

FTSE 100 share price opportunity 

With its share price down by a third over just the last month, the shares are looking very cheap. They trade on a P/E of seven, which is very low. Below 15 is often seen as offering good value to an investor.

The FTSE 100 housebuilder has some of the best margins in the industry. This is the main reason why I believe it to be one of the best investments. Margins are around 30%, which is far better than sector peer Barratt Developments where the margin is more like 20%.

Persimmon is taking positive steps to improve its battered reputation. Evidence that this is working can be seen in the fact it’s set to achieve a four-star status from the House Builders Federation.

Back in January, the housebuilder’s results showed that even though it sold slightly fewer homes, the average selling price rose by 1.5%. On top of that, Persimmon secured over 9,900 new plots of land during 2019. That provides plenty of opportunities once things return to normal.

At the start of 2020, the share price was heading strongly upwards, reflecting the company saying the year had begun in a “robust” manner. There’s little reason to think that once the pandemic passes, the share price can’t regain the momentum it had.

Overall, I think now is an opportunity to buy shares in a FTSE 100 company that combines recovery potential with a cheap share price. Even setting aside the lack of income in the foreseeable future, I think there’s a lot of opportunity for the shares to bounce back strongly.

The post This FTSE 100 share price has fallen by over 33%. I’m buying and here’s why appeared first on The Motley Fool UK.

More reading

Andy Ross owns shares in 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.

Motley Fool UK 2020

Watch the latest videos from Yahoo UK