I’m considering three shares for my own portfolio right now. And if I buy them, they’ll be constituents of a wider portfolio of holdings diversified across various industries and sectors.
One investing theme that interests me is housebuilding. With interest rates at record lows, there’s a tailwind driving the housing market in the UK.
I reckon the housebuilders are shares to buy
The London-listed housebuilding companies have been trading well for years. However, most of them suffered a setback in 2020 when the pandemic arrived. And their share prices plunged along with those of many other companies last spring. But housebuilding stocks have been clawing their way back up because of recovery in their underlying businesses. I reckon there’s still time to invest in the sector.
Should you invest £1,000 in Dunelm right now?
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For example, I like the look of FTSE 100 constituent Barratt Developments (LSE: BDEV). Today’s half-year results report covers the six-month period to 31 December 2020 and contains some encouraging figures. For example, compared to the year before, completed homes rose by just over 9%. Revenue increased a little over 10% and there was a 1.5% advance in earnings per share.
A strong cash performance backed those figures. Net cash on the balance sheet increased by just over 155% to a little under £1,107m, up from just under £434m a year earlier. And the directors reinstated shareholder dividends by declaring an interim payment worth 7.5p per share.
Chief executive David Thomas said the fundamentals of the housing market are attractive and the outlook for the full year is “in line with expectations.” And City analysts predict a rebound in earnings in the current trading year of around 26% with a further advance of 10% the following year. That figure isn’t guaranteed, of course.
Meanwhile, with the share price near 684p, the forward-looking earnings multiple is just above 10 for the trading year to June 2022. And the anticipated dividend yield is around 4.6%. That valuation looks undemanding, so what could go wrong with my investment? The answer to that question is… plenty! There’s always risk involved when investing in shares.
Diversification to balance cyclicality
One danger is that the inherent cyclicality of the industry could lead to volatility in the company’s earnings, dividends, and share price. It’s possible that a five-to-10-year investment could lead to a flat investment outcome. I could even lose money on my investment rather than making gains, and that outcome could occur despite apparent growth in the underlying business.
So I’d diversify into other sectors and stocks too. For example, I’m keen on the strong and consistent cash flow recorded over several years by pharmaceutical giant GlaxoSmithKline and meat-focused food producer Cranswick. However, growth in earnings has been elusive for GlaxoSmithKline, dividends have been flat, and the share price has been weak.
And Cranswick sports a rich-looking valuation and a low dividend yield. However, I think the firm looks well placed to raise the shareholder dividend incrementally in the years ahead. On balance, I like the defensive cash-generating qualities of these two and see them as a good contrast and diversification compared to the cyclicality of Barratt Developments. I’m tempted to buy shares in all three of these companies right now, despite the risks.
