Member Info for LorenzoLynch

Strictly,

Redrow and Bellway were almost on par. There’s no shame in timing things in a less than perfect way. Nobody has a crystal ball and it’s difficult to sit on the sidelines when you can clearly see significant upside in a stock. I restructured my portfolio completely today, so 20% of my portfolio is now in HB’s (11% in BWY, 9% in RDW). I’ll increase that to 30% if we see an SP capitulation or a surprisingly (at least to me) resilient housing market. Are you averaging down?

For me, once I see 100% upside in a stock with a < 3 year time horizon, I’m in. No ifs, buts or timing the market. Any drop from there and I simply buy more, so I welcome it with open arms. I personally won’t be paying too much attention to the next set of results as I don’t think they’ll offer much long-term insight, but it’ll be an interesting read for sure, especially when it comes to comparing and contrasting the resilience of each HB

Trump & Truimph,

Very good posts from you both, thank you. I think the questions to ask is ‘where would inflation be without the aggressive QE?’. Let’s just say, I don’t think the oil and food industries would be breaking records with their profit margins. Supply chain issues are only one piece of the puzzle imo. With all due respect Trump, when you say the BoE don’t have a clue, I think you’re very wrong (people make this same mistake when it comes to the govt). They know exactly what they’re doing, but imo, their objective isn’t simply reducing inflation. In fact, I think creating an high inflationary enviroment was an intentional economic strategy for many governments of the developed world (it’s what I would have done and exactly what I expected and warned my family about), because with interest rates close to zero in many developed countries, how else were we going to stimulate the economy during this short-term debt cycle? Moreover, we’re actually at the end of a long-term debt cycle (the biggest economic issue on the planet, yet you’ll rarely hear it mentioned on the news by the economic analysts). High inflation (asset price and cost) justifies higher interest rates, so that further down the line, we can reduce interest rates in order to stimulate the economy. This goes much, much deeper than the U.K. housing market. Furthermore, asset price inflation also gives the illusion of wealth creation; something that is incredibly important, psychologically. Boom-bust is the very nature of this economic system, although everybody seems surprised when each crash occurs. I digress slightly, but how was I, a mere mortal, able to foresee this inflation while the federal reserve believed that it would be transitory? They knew exactly what was going to happen, and they kept the printers going until their target was achieved imo, and I must admit, it was completely necessary. I often consider where GDP and asset prices would be now without the recent round of economic stimulus. Avoiding deflation will always be top of the agenda for central banks

Portfolio,

There’s no such thing as a ‘realistic mortgage rate’. It’s always relative the base rate, whatever that may be. Interest rates fell to zero before in order to stimulate the economy, and we’ll likely see them there again (or close to it) during the next decade if economic growth remains stagnant. A.I. seems to be the only thing that could kickstart our economy, but I wouldn’t bank on it

Portfolio,

No, not necessarily. There is a shortage out housing, and that’s been reflected in the price of housing in relation to household earnings for several decades. Paying 12% in the past is irrelevant. What matters is the relative increase in interest rates. For example, if the baseline rate was 11% for 10 years, a 1% increase wouldn’t cause a housing crash. However, if you think the baseline rate can go from zero to, say, 7% in a short period of time, with high cost inflation (primarily in food and energy), and there won’t be a serious correction in house prices, because of latent demand, then yes, you’re either in denial or in an asylum (said in jest, of course). There are mitigating factors though, with wage increases being a significant one; you’ve mentioned another. Note, that even if your theory is correct about buyers waiting on the sidelines, the result is the same: a decline in the sale of houses and a fall in house prices. Ironically, there was a 19% fall in house prices at the end of the 80’s to early 90’s (a 37% fall, adjusted for inflation), when ‘life went on’. House prices were much lower in relation to earnings back then as well, I believe? Are you expecting house prices to remain stagnant or increase over the next few years? Or do you expect a small correction? I think we’ll see a correction, but I don’t think the housing market will collapse, or anything like that. 16% of my portfolio is in housebuilders. I will make that 30% if my forecasts turn into reality. As I keep saying on here, if you’re invested now and you hold for several years, you’ll make some serious coin, so I’m no de-ramper, I just accept reality and that’s why I’m not sitting on a big loss right now, whereas others are… and those losses are likely to get much bigger imo. Also, the downside differs from one HB to another; something that I think is often overlooked

Avocet,

Who expected house prices to collapse during the pandemic? I certainly didn’t. People were forced to save money and the money supply sky rocketed, whilst interest rates remained at close to nil. We also had lots of people claiming furlough whilst working cash in hand, while others were committing fraud and pocketing tens of thousands in the process. There were additional factors as well. Today, people are being forced to spend, nobody is getting free handouts (or at least nobody who could afford to buy a house), interest rates are increasing at a pace and so on. I don’t mean this in a condescending way, but you should honestly do some more research into economics, and don’t listen to economic analysts, half of them are absolutely clueless. I highly recommend the books of Adam Smith and Ray Dalio

Strictly,

While I agree with completely in terms of ROE, I personally don’t apply that rule with PSN vs BWY, because imo, the only reason PSN has a higher ROE is due to the fact that they only have a few months of inventory on their books, whereas Bellway (the last time I checked) had something like 11 months of inventory. Were the companies to have the same level of inventory, then yes, I’d say that PSN is the better stock to own. I expect PSN to fall another 40% from here, with BWY falling, c.25%. This of course assumes that there is no government intervention and inflation remains stubborn. That said, from such a bottom, PSN will offer the most upside imo. Only then will I consider opening a position with PSN. I think a lot of investors are in denial about where we’re heading. I trimmed my housebuilders earlier this week and I’m moving to a more diversified portfolio now, so I can pivot effectively as certain stocks tank, while others rebound. Do you think BWY will be able to maintain a 5%+ dividend throughout this downturn? This is the question that’s preventing me from valuing it effectively at the moment. Also, you raised an incredibly valid point in another post regarding share price movement which I’m in full agreement with. Establishing what is going to happen with the housing market is one thing (I’m confident in my conclusions here, as house prices are dependant on the availability of cash and affordability & availability of credit), but trying to guess where the share price will go is, at least imo, impossible. I think some damning data will be released during the coming months though, so I’m willing to bet that we haven’t reached the bottom yet. That will occur when fear has peaked; and judging by the amount of denial I’m witnessing (true denial, e.g. ‘there’s a housing shortage, so prices won’t fall’), I don’t think we’re there yet. I can’t say I’m stressed though, as we all know how this ends for those of us who are still holding our shares in 3-5 years time

Tao,

I reassessed both CARD and my housebuilders earlier. The result was me trimming the HB’s, due to them likely having a significantly longer time horizon, and buying some CARD (7% of my portfolio; my smallest position). 70p is still the realistic bottom for me. At that price, or close to it, I’ll be buying aggressively. At £1.50 per share, I’ll sell every share

PageOfCups,

What’s the name of this company that you’re referring to? Or is this a hypothetical scenario?

Tao,

I fail to see how CARD is worth £1.80, even with growth forecasts, but I agree that it’s undervalued. £1.30-£1.50 is roughly where I’m thinking, but achieving fair value in this economic climate, with rising interest rates, isn’t a very realistic possibility imo. I think 70p-£1.10 is the range CARD will trade in over the next 12 months, but I think it’ll spend most of its time floating between 80p and £1. After the full year results, it could be a different story, however.

I am considering trimming my housebuilders and adding here though, as I think the recovery could be quicker for CF, and I can only see housebuilders going one way for the next year or 2… and it’s not up. I spoke to my Dad (DaMatser; he posts on here occasionally) yesterday and he’s got me asking some serious questions. The pen and paper will be out later

MrMark,

I own 6 stocks. Each of them offer over 100% upside. That’s why I don’t own CARD right now. It’s about relative value. Imo, CARD is the 7th or 8th best stock that I’m aware of. It’s a tough call, because the other stock offers global diversification, but they’re facing tougher headwinds than CARD. I’d likely buy both simultaneously. I wrote a detailed valuation of CF on here after the last results RNS. There’s plenty of upside here, assuming that earnings grow this year. My Dad has shares here and I actually told him the other day that if I was him, I’d be buying at these levels as he’s playing with much more money than I am, and due to his age, he has less time to financially recover from a significant loss. At 70p, I’ll be buying, 100%. If my other stocks rise significantly and this remains at 90p, I’ll be buying. I’ve bought the highs and sold the lows here since 2020, and publicly stated when I’ve done this. When I sold at £1.10ish recently, I was wrong to do so, according to some. Likewise, I was an idiot when I was buying at 30p

Alnwick,

While there’s obviously no debate between MOON and CARD, I can’t say I agree with you on CARD’s P/E. If you deduct last year’s one-off benefit of £3.5m, then apply a 25% tax rate, you’re talking c.£36.5m underlying net income for the year, which gives us a p/e of c.8.5. It’s still cheap, but a p/e of 7 today on underlying net income would give CF a market cap of £255m (74p per share). 70p is roughly where I’d consider a re-entry here, although it may never come, but I fully accept that I could miss out

Steve,

Lower income households are always hit the hardest by inflation as they have less disposable income and less savings to weather the storm. Food inflation (@ c.20%) is incredibly difficult to mitigate, because, well, it’s essential for survival and it equates to a much higher % of household income for lower income households. It’s well-documented that this demographic is struggling. I agree that those who are remortgaging are in trouble, especially those with low household income as they’re going to get hammered by both inflation and increased mortgage payments

Strictly and Panda,

Strictly, very valid point on PSN’s ROE. As I stated earlier, if all the housebuilders bottom out at a similar P/B, this will be the HB stock to own. However, I don’t think the higher ROE justifies the current premium on P/B. Like yourself, I’m invested in Redrow and Bellway. PSN is the only other HB in the debate for me. If the P/B gap closes, it’s highly like that I’ll also own all 3. I’m 50/50 atm. A big concern for me with PSN atm, is that they sell to the people who are being hit hardest by inflation. It’s the reason I’m 50/50, instead of being 60/40 in favour of BWY. What are your thoughts on this?

Panda, Bellway (for example), could stop building houses now and still match last year’s revenue with their inventory. Likewise, if they were to fall on hard times, they would be acquired (I imagine) on the strength of their balance sheet. The last time I checked, inventory was regarded as an asset. If those assets cost money to maintain, then that is a operating cost, is it not? The bottom line is this: if I wanted to buy a housebuilder and simply liquidate the company, I would be far better off buying Bellway right now than PSN. That suggests to me, that owning BWY is lower risk. Moreover, the SP is more tightly underpinned by book value. Would all of this matter during a housing market boom? No. Does it matter in relation to the current economic outlook? In my opinion, yes. If the market panics, I’m 99% sure that PSN will far by a greater magnitude than BWY, for the reasons I’ve mentioned. It’s your money though, I’m just telling you my perspective. Anybody who invests in either of these companies during the next 12 months is going to make a pretty penny. That’s all that matters

Stevebt,

That’s fine, but their competitors already have a huge inventory of houses to sell, which puts them in a favourable position. In the incredibly unlikely event of liquidation, where would you suffer the greater losses? If PSN had a huge inventory, would that not justify a higher market cap, or are assets completely irrelevant? My point was that the P/B is higher here due to lack of inventory, and I expect that this will eventually be addressed with a correction in the share price. If we assume that all housebuilders suspend their dividends next year, surely their P/B ratios will fall to a similar rate, assuming there’s not a monumental difference in earnings (both actual and forecasted). In fact, the lack of inventory (and consequent high P/B) was the main reason I swerved PSN in favour of alternatives. When a company can’t be valued on its earnings or, imo, excessive dividends, all attention is drawn to P/B, as seen during the last housing market correction. In a realistic worst case scenario, I think this could fall another 50%, compared to 30% with some of its competitors. That said, PSN would offer the most upside from there, upon recovery, based on earnings, so I’ll be adding it to my portfolio, should this occur

In PSN’s case specifically, it’s the lack of inventory (in relation to market cap) vs competitors that leaves it with such a poor P/B. I’d rather invest in a company that has houses ready to sell, personally, especially with a downturn on the horizon

Why are so many people so desperate for the SP to increase today? Ok, a higher SP means less dilution, but so what? All that matters for me is what’s in the ground, how quickly it can be extracted, and at what price we can sell it all for. Personally, I’d love to see this back at 5p, so I welcome a return of the de-rampers. Of course, I’d be loading up in that unlikely event. Moreover, a lower SP makes it easier for me to sit on my hands. In an ideal world, I’d love to see Morocco tested and sold in a single deal, so I can continue to sleep at night. Incredibly exciting times. Downside on the decline, and potential upside on incline… not a bad combination

This BB is incredible. Comedy gold and a wealth of knowledge. I’m a mere mortal in this sector, so I don’t say much, but I’ve been invested here for around 2 years I think, learning along the way, and buying more shares in every dip. It’s my lottery ticket (can’t find one with a comparable risk vs reward ratio). I must say, I’m very optimistic. I won’t be worrying about valuations however, until we at least know how much gas we’ve got, and how quickly we can extract it. Thank you all for your contributions, I really appreciate it

Feet,

What do you think the bottom will be form rival housebuilders? Say, Bellway and Redrow

Oracle,

You’re referring to asset price inflation. Rising interest rates, high consumer price inflation, falling household savings, low consumer/house-buyer confidence, no economic growth = asset price deflation. Furthermore, as Feet mentioned, you can throw house build cost inflation into the equation. Even with all the will in the world, how are most people going to buy houses in this enviroment? The question isn’t ‘are house prices going to fall?’. It’s ‘how much are house prices going to fall?’. This is what’s driving me crazy and I can’t say I have any confidence in what analysts are forecasting (anything from 5% to 30%, from what I’ve seen). 10%-20% is what I expect, but at which end of that spectrum is beyond me. Accordingly, I’m going to keep a sizeable holding, but I’ll certainly be prepared for a fall to a P/B of 0.5. I must say, after looking at some balance sheets earlier, I can see most housebuilders suspending dividends in FY25, and that will be accompanied with decreases in the valuation of assets, thus reducing NAV. While there’s a shortage of housing, I think it’s also prudent to consider the shortage of disposable income, household savings and affordable mortgage deals.

Lastly, thank you all for your contributions lately. Some serious value has been added to the BB from both sides of the debate

Feet,

I wasn’t investing in 2008 as I was 15, but I recall a great deal of economic uncertainty; much more so than we’re seeing today. Personally, I don’t think the current situation is anywhere near as severe as back then. It will take time for things to be resolved, sure, but there’s a pretty clear path out of this imo, so I don’t expect the market to become as fearful as it was back then. I think we’ll retest those levels that we saw in October 2022 (for my housebuilders, anyway) when the doomsday headlines start coming in thick and fast, but I can’t see us sinking much lower than that. If we do, I’ll be overjoyed. I fully agree on your thoughts on PSN. I’m going to get the calculator out in a bit and re-evaluate my weightings