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Sunday share tips: Persimmon, Black Monday anniversary

Sun 22 October 2017 18:53 | A A A

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(ShareCast News) - In the Sunday Times' 'Inside the City' column this week, John Collingridge focussed on housebuilder Persimmon, describing the last five years as a "dizzying journey" for the company's shares.

They have climbed to £28.49 from around £4.70 at the beginning of 2012, taking its current valuation to a mammoth £8.8bn, with its profits, dividends, cash balances and number of completions also enjoying similarly impressive increases.

Its average selling price was ahead 17% in the same five year period, and completed sales were 53% improved.

Collingridge said that has made some people "very rich", with the builder's management - led by chief executive Jeff Fairburn - sitting on a bonanza of a bonus scheme worth north of £600m.

Shareholders were sharing in the lolly scramble too, however, with its 'capital return plan' having paid out £1.5bn since being established in 2012, with aims to share £2.8bn by 2021, making Persimmon one of the most generous dividend payers on the FTSE 100.

There was a significant mark on its share price chart, however, around 24 June 2016, when its share price collapsed 27.5% the day after the Brexit vote.

Still, that was but a distant memory for traders, as Persimmon's stock had almost doubled since then.

Collingridge pointed out the disparity between the high-flying share price of housebuilders like Persimmon, and the sustained collapse in estate agencies such as Countrywide, Foxtons and LSL.

Shares in those three chains had fallen between 25% and 65% since the Brexit vote, with Collingridge pointing out that the market was "creaking" as transactions stagnated and agents reported serious reductions in the number of homes on the market.

Persimmon and its constructing peers were being held artificially aloft by ultra-low interest rates and market interventions such as the Help to Buy scheme, Collingridge claimed.

Help to Buy, where the government chips in a 20% interest free loan on top of a buyer's 5% deposit, along with historically cheap mortgages were seeing a constant stream of first-time buyers coming through the doors of each completed home.

And there wasn't much sign of a slowdown in the near term either, with the Tory government promising another £10bn into it along with a chance of more support in November's budget/

"Persimmon, like its peers, is hooked on the Help to Buy drug," Collingridge quipped, adding that around 50% of its private sales made use of the scheme, although the bubble had to burst at some point.

"Eventually, the wider market malaise, weak consumer sentiment and higher inflation will feed through to demand for new homes, too."

Collingridge added that when interest rates begin to rise, the market would be given another jolt which could see builders suffer, especially when combined with a drop in migration post-Brexit.

Over in the Mail on Sunday, Joanne Hart looked at the Black Monday crash of 1987 for the paper's 'Midas' column - a day in which the FTSE 100 fell 10%, just three days after the Great Storm blew across Britain and closed the stock market on the Friday beforehand.

"As investors rushed to sell shares and debris littered parks and streets, serious questions were raised about whether the world would ever be the same again," Hart wrote.

She claimed that 30 years later, market watchers were asking similar questions as world indices continued to hit record highs among "strange and stormy" economic and political conditions.

Economic growth in the UK is expected to be 1.6% this year and just 1% in 2018, with high employment being offset by the depression of real wages, with inflation hitting 3% while wage growth sat around 2%.

Add the prospect of interest rate rises, Brexit uncertainty, the prospect of a lurch to the left in Westminster, the idiosyncrasy of the Trump administration across the pond, and growing concern over China's ability to balance the books, and the outlook was looking "pretty grim" according to Hart.

She claimed a number of large investors and analysts were spooked enough by the current market conditions that they were keeping up to a third of their money in the safety of the bank's vaults, even as interest rates paid on cash remained woefully low.

But Hart points to the value of sticking with the market, noting that an investor who put £10,000 into the FTSE 100 just before Black Monday would have seen the value of their investments plummet to just £6,600 within a number of weeks.

However, had that investor stuck it out, that £10,000 would now be worth £34,770 if they had taken their dividends, or £104,340 if they'd reinvested it.

Similarly, investors who put money into the markets before the global financial crisis would have seen a fall in value for a couple of years afterwards, but would now be sitting on something worth 170% of the initial investment if dividends were poured back in.

All of which begs the question, Hart notes, of what an investor should do now?

Consumer staples were a typical stock to turn to in times of turbulence, but that wasn't looking so rosy after Unilever recently described market conditions as "challenging" and Reckitt Benckiser issued a second sales warning of the year last week.

Another popular option would be income stocks with good dividends, although Hart noted that many of the market's more generous dividend payers had risen substantially while their dividend cover had fallen, making the business more vulnerable.

AJ Bell investment director Russ Mould recently pointed out a number of quality dividend payers now had cover that looked "particularly skinny", including BP, Centrica, Direct Line, Royal Dutch Shell, SSE and Vodafone.

One recommendation from The Share Centre was catering firm Compass, with the stockbroker describing the company as extremely defensive, with other brokers reportedly saying the same of AA or PayPoint.

Hart said the more contrarian investor might have the confidence to buy "cheap" and "unloved" stocks, point to high street banks or struggling retailers, such as Barclays, Lloyds or Next.

"Generally, however, a more cautious approach is recommended," Hart wrote, adding that "the lessons of history are telling".

"Invest in a broad range of shares to create a diversified portfolio exposed to different sectors and even different countries.

"Then reinvest the dividends. Over the decades, that should pay off, whatever the external environment."

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