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Many investors will be scanning the FTSE 100 right now, looking for the best stocks to buy after the recent correction. Three names jump out but could they actually be the worst to target right now?
The Iran war has rattled markets, but housebuilders have been hit especially hard. The three worst-performing blue-chips over the past month all hail from that sector: Persimmon, Berkeley Group Holdings (LSE: BGK) and Barratt Redrow have each fallen by a bruising 25% or so.
It was a different story at the start of the year, when investors anticipated falling interest and mortgage rates. The oil price spike has reversed that.
Housebuilders tend to be on the front line whenever economic sentiment takes a hit. They took a beating after Brexit, the cost-of-living crisis and the inflation spike. Now they’re being pummelled again. All three are trading at 10-year lows. Which will tempt some, and terrify others.
Berkeley Group is downbeat
Developers have taken a string of sector-specific hits too. The end of the Help to Buy scheme in 2023 squeezed demand for new homes. Builders have had to absorb huge bills linked to cladding remediation following the Grenfell tragedy. They’ve also been hit by higher employer’s National Insurance contributions, two big hikes to the minimum wage, and more expensive materials. The pressure has been relentless, and it showed in Berkeley’s latest update on Wednesday (2 April).
The board warned it’s scaling back activity after what it described as an unprecedented surge in costs and regulation. It’s struggling to generate acceptable returns on new projects, has paused land purchases and plans to slow construction across existing sites.
Delays in approvals from the building safety regulator have added to the strain. Even if the Iran war ends quickly, management expects mortgage rates to remain elevated for some time.
Berkeley still expects to deliver about £450m in pre-tax profit this year, but longer-term expectations have been cut sharply. Forecast profits for the years to 2030 are now far below previous estimates. The shares plunged almost 10% on the day, and dragged the wider sector down with them.
Struggling FTSE 100 sector
This was a bleak update, and it has left the stock looking cheap on paper, trading on a price-to-earnings ratio of around 8.5. The yield, however, is only about 1%. Given the outlook, that’s not enough to tempt me.
Persimmon and Barratt Redrow offer far higher yields of 5.45% and 6.78%, respectively. The question is whether those payouts can be sustained if conditions remain tough. I’m not wholly optimistic. Bargain hunters who want exposure to what remains a key part of the UK economy might want to take advantage of today’s low valuations. But they’ll need to be patient, and brace themselves for further volatility.
I can’t see a clear path out of the current difficulties. Years of near-zero interest rates drove prices to unaffordable levels, especially for younger buyers, the market’s lifeblood. With demand uncertain, costs elevated and borrowing getting more expensive, this recovery could take time. After the recent correction, I can see plenty of stocks to consider buying on the FTSE 100, and most look a lot more tempting than these three.
