Why we’re sticking with this builder – and why we all need to watch ‘Doctor Copper’

Springfield Properties’ valuation looks tempting, says Russ Mould, who swears by three economic early warning systems

Housebuilding stocks continue to crumble, weighed down by worries about 2021’s end to the stamp-duty holiday, higher input costs and rising interest (and mortgage) rates.

As a result, our initial analysis in January of Scotland’s Springfield Properties leaves us sitting on a paper loss, but a healthy balance sheet, tempting valuation and a smart-looking acquisition all seem like good reasons to take a patient, long-term view, even if sentiment is dead against the stock and housebuilding sector right now.

If we thought Springfield was cheap four months ago then the shares’ decline only sharpens our focus here. Based on analysts’ consensus forecast for the company’s financial year that finished in May, the stock trades on barely eight times earnings and offers a yield of nearly 5pc. Better still, the £147m market value compares with net assets of £113m. That equates to just 1.3 times book value, towards the lower of the end of one-times-to-two-times range that helps investors assess whether builders are cheap or expensive.

Granted, the shares do not trade at the bottom of that range. They could go lower. But the balance sheet had just £47m in net debt at the last count, so there is no pressure there, even in the event of a recession. In addition, Springfield’s £46m acquisition of fellow Scottish builder Mactaggart & Mickel earlier this month is structured so that three quarters of the payment is made over five years, in line with the volume of houses sold, while analysts think the deal should be earnings accretive in 2023 and 2024, all other things being equal.

We’ll stick with Springfield. Hold.

Recession alert

The admission from Jerome Powell, chairman of the Federal Reserve, that the US economy could tip into recession represents refreshing honesty. The question now is how investors can tell if he is right, especially as where America goes the world tends to follow.

Economic data is looking more ominous. US retail sales and housing starts are weakening, as interest rates and mortgage rates quickly increase. However, all economic data is, by definition, backward-looking and therefore of little use to policymakers or portfolio builders, so the Fed’s “data dependent” stance should be treated with some caution.

Concurrent indicators such as purchasing managers’ indices and sentiment surveys may offer more timely data. On this score, America’s NFIB smaller companies’ indicator is a concern. America’s 29m or so smaller businesses employ more than 98pc of its workers and the latest NFIB reading came in below its 48-year average of 98 for the fifth time in a row in May. Previous dips below 100 forewarned of the American recessions of 1991-92, 2001-02 and 2008-09, although there have been occasional false alarms.

Those who believe in free financial markets may prefer to rely on their collective wisdom. A decline in the price of each of copper, smallercompany equity indices, such as the Russell 2000 and Britain’s FTSE Small Cap, and America’s Dow Jones Transportation index makes for a grim-looking trio.

“Doctor Copper” is a good guide to global economic health as the metal’s ductility and conductivity mean it is used in so many industries. Smaller companies tend to be much more sensitive to their local economy.

And Richard Russell’s Dow Theory states that the industrials cannot do well if the transports are doing badly, because weak transport stocks imply that goods are not being shipped because of an inventory pile-up, weak demand or both. By contrast, a surge in transport stocks suggests demand is good, because shelves and forecourts must be replenished and the newly manufactured products must be moved around.

All of this is happening as Western central banks raise interest rates, start to reduce quantitative easing or both. That is not a great combination and central banks will doubtless, at some stage, change course and start to loosen (and print) once more. Doctor Copper, small caps and the transports are likely to sniff this out before analysts and economists, if history is any guide, so keep watching those.