Investors shift focus to quality as markets retreat and Taylor Wimpey gets cashed up for land buying spree

“Investors are finding it hard to make up their minds if they are worried about the coronavirus or not,” says Russ Mould, Investment Director at AJ Bell.

“One day they are happy to shrug it off and bid up stocks as if there will be no impact to corporate earnings at all. The next day they are fretting over the potential of second waves happening, even though such risks have been present all along.

“Second wave incidents will be closely monitored by the markets to see how quickly new outbreaks can be contained. The focus to date has been on Beijing but cases have been recorded in provinces across China.

“Making matters worse is that various US states are still reporting record numbers of new cases, implying that the pandemic is not yet under control.

“Today is very much a risk-off day with investors selling miners and leisure stocks, with Carnival the biggest faller on the FTSE 100.

“Value stocks were off the menu with investors instead bidding up companies deemed to be quality stocks such as rat catcher Rentokil, safety services group Halma and London Stock Exchange.

“The FTSE 100 index fell 0.6% to 6,213, echoing similar declines in European and Asian markets.”

Taylor Wimpey

“Fortune favours the brave and in time Taylor Wimpey’s plan to raise £500m for a land buying spree may look an inspired call.

“Part of the reason housebuilders have been so profitable in recent years, alongside the Help to Buy scheme, strong supply/demand dynamics and the availability of cheap mortgages, is they acquired land cheaply in the wake of the financial crisis.

“Taylor Wimpey had already signalled its intent to hoover up land from a variety of sources amid the market disruption created by the Covid-19 pandemic.

“Clearly management feel there is a finite window of opportunity which they intend to take full advantage of with these new funds. Chief executive Peter Redfern’s £200,000 investment in the share placing gives him some skin in this particular game.

“With at least a couple of years between buying the land and completing a build, Taylor Wimpey has time for the housing market to recover. Confidence in an eventual recovery may be bolstered by the solid trading seen since the English housing market emerged from hibernation.

“On the negative side of the roster is the fact investors are being forced to stump up money for a business which already has a pretty strong balance sheet.

“They may not mind if the company can generate bumper returns on this cash. Fortunately there is a scale to measure this against, with Taylor Wimpey hoping they will be in excess of the 21%-plus operating margin it is targeting for the medium term.”

These articles are for information purposes only and are not a personal recommendation or advice.