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After a cocktail of macroeconomic issues have been plaguing the housing sector, Taylor Wimpey (LSE: TW.) shares have slid into ‘penny stock’ territory. Well, not quite. That moniker is reserved for companies with a £50m-£100m market cap, but the idea of the shares in one of Britain’s largest housebuilders trading for just pennies looks alarming to me.
In the last couple of months it has perhaps been bucking this trend however. The shares have risen over the £1 mark again, climbing to 109p a pop. And one analyst has a 172p price target over the next 12 months – that could be a 58% return in a year!
Recent news
One negative that has come out in recent days has been a ‘cooling’ housing market. Nationwide reported a 0.4% drop in house prices for December when a 0.1% rise was expected. That makes the rolling average for the year the worst it’s been since 2024 (which admittedly isn’t exactly that long ago).
Falling house prices and a lack of demand is a risk for housebuilders like Taylor Wimpey. Margins are getting squeezed at the other end from higher wage costs and pricier building materials, so a drop in revenues will hurt all the more.
On the other hand, cheaper house prices could encourage more budding buyers into the market. Many possible homeowners had stayed on the sidelines after worries about the recent budget’s impact on stamp duty. Taylor Wimpey suffered a near five-year low around the time.
Turnaround?
If we’re due for a turnaround, then there’s plenty of reason to think the shares have room to climb. They might even regain their status on the FTSE 100 after falling onto the smaller index, the FTSE 250.
The shares look cheap to me, based on both earnings and assets. A price-to-earnings ratio of just 12 is the headline figure. There aren’t too many high-ranking stocks trading on a lower valuation than that at the moment. That tells us the firm is earning large amounts of cash compared to the price we are paying for a share.
The massive 8.55% yield is a bonus too. It’s rare to see a dividend yield stay that high for long. That’s because of two common possibilities, one good, one bad: either the share price rises, which brings the yield down – or the firm can’t sustain payments and issues a rebase or cut.
While it’s important to remember that housebuilding is dealing with challenges on many fronts at the moment, I’d say this is one of those areas that looks ripe for a turnaround and investors may wish to think about. I wouldn’t be surprised to see this look like a cheap time to get into Taylor Wimpey shares in a few years’ time. I’d say the share are worth considering.
