The larger-than-expected drop in inflation announced earlier in the week has led to a rally in the FTSE 100. Nevertheless, I think there are plenty of bargains still to be had.
Green shoots
The slowing pace of inflation is particularly good news for UK housebuilders like Taylor Wimpey (LSE: TW) since it makes it more likely that the Bank of England won’t need to be quite so heavy-handed when it comes to future interest rate rises.
As things stand, analysts and commentators now expect a 0.25% hike in August.
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Clearly, that’s still not ideal for those coming off fixed mortgage deals in the near future. However, indications that rates might be levelling out could lead to demand for new homes being rekindled.
In time, that could mean a rebound in the Taylor Wimpey share price. In fact, the jump seen in the aftermath of this week’s announcement was evidence that at least some investors believe the worst might be over.
No sure thing
Perhaps this is too simplistic. In reality, a number of factors could dictate whether we now see a sustained revival in the property market.
Even so, it feels like a lot of negative news is already reflected in Wimpey’s valuation. Lack of crystal ball aside, I’m not expecting the share price to crash from here barring some cataclysmic global or domestic event, although I’d never say never!
Indeed, the shares could turn out to be a bargain if earnings projections are eventually revised.
To me, the 7.9% dividend yield, while never guaranteed, is worth banking in the meantime. It easily beats the 3.7% of the FTSE 100 index, going some way to justifying the additional risk involved.
All told, I’d be buying here today if I didn’t already have exposure to the sector via one of Taylor Wimpey’s rivals.
Another FTSE 100 recovery share
Falling inflation and a settling (or perhaps even reversal) of interest rates could also push those sitting in cash positions to put money back into the market. That may mean more business for financial services firm Hargreaves Lansdown (LSE: HL).
In fact, there are indications this might already be happening. A recent update on trading included news of a 6% rise in net new business in Q4 compared to the previous quarter.
Going cheap
One of the biggest attractions of this top-tier stock for me at the moment is what I’m expected to pay to acquire it.
A price-to-earnings (P/E) ratio of 15 for the current financial year feels like great value considering the company’s five-year average on this metric is over 30!
Analysts also have the firm returning 46p per share in FY24. According to my calculations, this translates to a chunky dividend yield of 5%.
False dawn?
This is not to say the shares are a safe bet from here. Competition in this area is intense and pressure to lower fees effectively means lower profits for the company.
Share price performance over the last few years has also been very poor.
Last, it goes without saying that this week’s rally could prove to be a flash in the stock market pan.
Notwithstanding this, I reckon the shares could be in bargain territory.
I’d be willing to buy today with any spare cash I had.
