It’s been a good year for Bovis Homes (LSE: BVS) as shares of the homebuilder have soared 56% since this time last year on the back of solid results, takeover rumours and the appointment of a new CEO. But after this stellar run I’d look to start taking profits if I were a shareholder as the stock is looking pricey compared to competitors and the housing market looks increasingly peakish.
The first reason I’d look to dump Bovis is that at this point in the economic cycle, investing in homebuilders is a frightening scenario to my mind. Demand growth picked up nicely immediately following the end of the recession but now tepid economic growth, the increasing threat of rising interest rates and possibility of a new government approach to the help-to-buy scheme make me nervous.
On top of this, Bovis has been knocked recently for the low quality of its homes. This led to its former CEO being ousted and the appointment of a new head honcho who is currently conducting a strategic review to be finalised and released in September. This whole scenario suggests big changes could be afoot, giving me more than enough reason to stay away from the company until such changes are announced.
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Then there is the fact that competitors look to me to be much more interesting investment options if I were minded to invest in the sector. For one, with net debt of £33m, Bovis’s balance sheet is significantly weaker than that of larger competitors such as Persimmon, which had over £1.1bn in cash lying around as of the end of June. The company’s operating margins of just 15.2% last year also leave much to be desired compared to competitors whose margins hit as high as 25%.
And the company is no bargain basement buy either with its shares priced at 12.8 times forward earnings. This is a significant premium to the likes of Persimmon at 10.2 times forward earnings, Taylor Wimpey at 9.7 or Barratt at 9.6. With competitors in better shape financially and operationally, Bovis is one homebuilder I wouldn’t touch with a 10-foot barge pole.
Flying into headwinds?
Wizz Air (LSE: WIZZ) is another FTSE 250 growth star that is looking increasingly overbought to me. Shares of the discount airline have soared over 60% in the past year and now trade at a hefty 13.4 times forward earnings, which is pricey for an airline.
What makes me nervous in this case is that across Europe, demand growth for airfares is slowing at the same time as budget carriers are adding capacity by significant amounts year after year. Indeed, in the year to March, Wizz Air increased its passenger numbers by 19% while competitors such as easyJet and Ryanair also increased the number of seats available by high single-digits or low double-digits.
All of this is leading to a fares war across the sector that caused Wizz’s revenue per available seat kilometre (the key industry metric) to fall by 8.5% year-on-year. Revenue still increased 10% during the period due to offering more seats, but this situation certainly appears to be the start of a repeat of the traditional boom and bust cycle airlines have always been stuck in. At this point in the cycle, I’d avoid Wizz Air, especially at its current valuation.
