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There aren’t many stocks trading for pennies on the FTSE 250 these days. While a share price valued in pence isn’t really a ‘penny stock’– in the UK this usually refers to companies that also have a £50m to £100m market cap – there is an allure to how cheap a share price of less than a pound is. And a stock sounds extra cheap after falling below that mark!
The newest entrant on this little list is Taylor Wimpey (LSE: TW.). The housebuilder has dropped to a share price of 99p as I write. The stock was on the FTSE 100 until very recently too. It got swiftly ejected because its market cap fell to £3.5bn.
The housebuilder is a curious stock indeed. It boasts a 9% dividend yield, a huge recent fall in value, and a share price that was higher back in the 1980s! Are we looking at a bargain buy here?
Unsurprising news
Before getting onto whether this could be a good turnaround play, it must be said that the recent drop in share price is unsurprising.
A couple of months ago, higher-than-expected costs on fire safety wiped out the firm’s profits in the first half. These come in the wake of the Grenfell tragedy where housebuilders are having to remove cladding from buildings, sometimes at great expense. Taylor Wimpey has set aside £435m in total to cover the amount. That’s more than the firm made in profit in both of the last two years.
Another factor in the decline is the demand for houses. Put simply, Britons aren’t buying. Higher interest rates and soaring gilt yields mean that borrowing money is more expensive than it has been in decades. With mortgage rates pushing north of 5% in some cases, I’m hardly surprised there has been a slowdown in folks stepping onto the housing ladder.
More and more
The bad news doesn’t stop there. The Bank of England recently decided to retain interest rates at 4%. Many had been expecting a rates cut. But with inflation staying irritatingly sticky, the ‘Old Lady of Threadneedle Street’ opted against bringing the rate down to 3.75%. The markets are currently expecting no further cuts this year, either. Cheaper borrowing from lower rates would bring down those mortgage costs and maybe get people buying houses again.
The icing on the cake? The firm set aside £18m because of a competition law case. The Competition and Markets Authority investigated whether Taylor Wimpey and other housebuilders had been swapping customer details with each other on pricing and incentives. Oops-a-daisy.
So that’s a lot of bad news. Perfect chance to buy the dip? Maybe. Buying stocks at their lowest is a winning strategy, if an extremely difficult one to get right. I have exposure to the UK housing market already. So with tax rises, high inflation, and a weak economy seemingly on the horizon, I don’t think I want any more at present.
