Price fall bad news for house-building group

By Graeme Dickson
Updated: 12:27 EDT, 17 November 2010

It was not that long ago when I put forward the idea of selling housebuilder Taylor Wimpey (TW.) after data from the Royal Institute of Chartered Surveyors (RICS) over the last few months showed house price valuations slipping.

This has now started to filter through to the Halifax House Price Index which is also showing waning house price sales.

Now that a healthy 12 per cent profit would have realised from a short sale in Taylor Wimpey at the prescribed entry and exit levels, perhaps it is a better time to look at another stock that has been flagged up with weak charting characteristics that operates in the same space:

The Group has £14 million in net cash which is a healthy change from the likes of debt laden Barratt Developments (BDEV) and Taylor Wimpey (TW.).

However, the prospect of falling prices and the difficulty for buyers, in particular first time buyers to get mortgages on low deposits, places an extra uncertainty for the house-building sector as a whole going into 2011.

The valuation also looks a bit stretched here on 45 times current earnings, falling to 26 times forecast 2011 earnings.

Perhaps investors in the sector feel that Bovis, with its developments largely concentrated in South-East England, is a safer bet given the London Olympics in 2012 and the scarcity of affordable properties in the region, compared to its indebted rivals, but above 20 times in a falling market seems a bit rich in my view.

A close above 365p will likely improve the technical outlook on the stock, but in the meantime the bears have full control of Bovis and I would expect the shares to test the long term support of 270/280p in due course.

Update

William Hill (WM) – suggested as a sell at 164p, the stock closed yesterday at 159.4p. The stock is on course to break-down towards the 137-150p level. Cut the position if the stock closes above 170p.

Punch Taverns (PUB) – mentioned as a sell at 69.05p, the stock closed yesterday at 61.1p. Lower the stop to the entry level of 69p but if the stock trades at 55p, take profits on half of your position.

Compass Group (CPG) – mentioned as a sell at 520.5p, the stock closed at 530p. The company is scheduled to release its preliminary results on Wednesday 24 November so hopefully we will gather more information as to whether the company can really keep its immunity from the global austerity measures set by governments' across the western world. If the stock closes above 560p, cut the position.

Avis (AVE)– suggested as a sell at 210p, the stock closed yesterday at 205p. Lower the stop based on a close above 230p but be on guard that the company is scheduled to release a trading update this Thursday.

Jardine Lloyd Thompson (JLT) – tipped as a sell at 566p, the stock closed yesterday at 579.5p. Keep the position but be aware of the 720p a share bid rumours circulating the market. A close above 605p will be a definite signal to exit the position.

Barclays (BARC) – suggested to sell at 309p, the stock closed yesterday at 273.3p, lower the stop to 294p to ensure profits.

The writer does not hold any shares or derivatives in the above mentioned companies. The material for this report comes from Alpha Terminal.