The stock market saw a huge increase in trading volume on Friday following the general election result. The exit poll late on Thursday night showed that the Conservative party had won a thumping majority (larger than expected) and the FTSE 100 rallied hard when it opened the following morning.
The index closed up 1.1% on Friday, with some standout performers showing impressive gains. The top riser from the FTSE 100 was Taylor Wimpey (LSE: TW), with a rise of 14.68% on the day. This kind of surge merits some deeper digging into what went on and whether I might still find future gains from investing now.
Individual or sector gains?
The first thing that struck me when I was looking over the individual performers at the weekend was that there was a common trend with the large risers. While Taylor Wimpey did post the top performance on Friday, four out of the top five performers all came from the same sector: housebuilders.
This included Barratt developments, Berkeley group and Persimmon. So without taking anything away from Taylor Wimpey, this looks firstly like a sector-driven general move. By tying this into the election result we can see why. One of the Conservatives manifesto promises is to build one million new homes over the next five years. Therefore, if you are a housebuilder, this is an obvious boost in demand for you.
Added to this is the general ‘status quo’ election result, ensuring there is no drastic uncertainty that could have resulted from a hung Parliament or indeed a surprise victory for other parties. This should maintain domestic demand, supporting domestic firms and sectors, particularly the housebuilders.
What about Wimpey?
The above is all good news for the sector as a whole, and so I expect good gains into the longer term for these firms if the Conservatives hold to their pledge. So should I pick Taylor Wimpey specifically to invest in?
Well, after including the special dividend paid in July, the dividend yield sits at just over 9%. From the last trading update in November, there is set to be another £610m worth of dividends paid out next year too. I think this robust and stable (in theory) future dividend makes Taylor Wimpey a good buy for investors looking for income.
For those looking for capital appreciation, the share price rally to 199p does put it close to five-year highs, including where the firm was trading pre-Brexit referendum in 2016. This makes me hesitant to buy-in at current levels because Brexit is not yet resolved and there could be another delay or a sting in the tail. As domestic firms like Taylor Wimpey are sensitive to local demand, is it really sensible to give it a company valuation at pre-Brexit levels? I don’t think so.
Therefore, the 14% move is definitely a good sign for the housebuilding sector in general, and for investors looking for income, the yield is attractive. However the company valuation derived from the share price is too high for me to buy at the moment, so I would look elsewhere in the sector to find better value.
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Jonathan Smith and 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 2019