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Smart Investor: a golden goose for investors' portfolios
Citywire's Smart Investor likes this share that has no debt, is profitable and is in an unloved sector which will benefit from future economic growth.
One of my main concerns when selecting companies to invest in is that I avoid the ones which will lose me a lot of money. Sounds simple, but this is the number one goal of the analysis I undertake. Sure, I may miss the odd golden opportunity but, then again, I also tend to miss out on quite a few banana skins.
Furthermore, I have learnt over time that if you are able to avoid disasters then you actually do not need many star performers in order for your portfolio to generate a substantial return and outperform the index. Indeed, if I have a small handful of golden geese in my portfolio, whilst having no dirty ducks, then I am a very happy investor.
One such golden goose is FTSE 250 listed house builder, Persimmon (PSN.L). Having gained 54.8% since I last tipped it as ‘one for your long term portfolio’ (versus a total return of 10.8% for the FTSE 350 over the same period), are shares still worth buying at £7.94 each?
Since I last wrote about the company, it has released a fairly drab set of full-year results for 2011. Whilst it was able to make a net profit in what continue to be highly challenging trading conditions, the bottom line fell from £115 million in 2010 to £109 million in 2011. Furthermore, this equates to a return on equity of just 5.9% which shows that Persimmon is not exactly hugely profitable at present.
Meanwhile, although dividends per share were increased by 33%, shares currently yield just 1.3%. Indeed, Persimmon’s payout ratio is incredibly mean at 28% and shows that the company is being highly conservative, which is understandable given the current economic climate.
Interestingly, much of the profit has been used to pay off borrowings, with Persimmon now having no debt. This again shows how conservative management are being and provides a vast amount of potential for the company to ‘gear up’ when the UK economy does (eventually) pick up. This fact should not be overlooked by investors; the disappointing ROE figure can be substantially inflated via the company taking on only a moderate level of debt in future years.
As for an economic moat, the house building sector is hugely dependent on the performance of the economy. As such, until the UK economy picks up it is unlikely that net profit will increase significantly. Indeed, as regular readers will know I attest to the economic cycle and realise that booms and busts never last forever. So, whilst it may take a while yet, I believe the UK economy will return to growth and the house building sector will return to far higher levels of profitability.
Still in survival mode
With shares currently trading at £7.94, Persimmon’s price to earnings ratio is 22, whilst its price to book ratio is 1.3. Although the P/E (price to earnings) ratio is excessive, this is a company which is still in survival mode owing to incredibly difficult trading conditions. Furthermore, it has no debt, is profitable and is in an unloved sector which will benefit from future economic growth.
Sure, its yield is poor, ROE is disappointing and valuing it based on current profitability makes it seem expensive. However, it remains a high quality company which has the potential to deliver significant returns for long term investors. The share price may not perform as well in 2013 as it has done in 2012 but this company and sector has a healthy long term future.
Smart Investor holds shares in Persimmon
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