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Are Taylor Wimpey shares a UK recovery play?


Is Taylor Wimpey (LSE: TW) a recovery stock? It is a question many investors will be asking themselves, as Taylor Wimpey shares started to nosedive again after hitting a nadir of £1 on 3 April, and then rallying briefly to £1.5 on 10 April.

That’s where the stock ran out of steam and started to slump again. For investors who lie awake worrying about the prospect of a double dip in the stockmarket, Taylor Wimpey looks like one of its poster boys.

But is that the reality of the situation? Taylor Wimpey told investors this week it would opening sales offices and show homes from 22 May, initially for pre-booked appointments, with strict social distancing in place. The company said it expected to recall most of its staff by the end of this month and confirmed work would also be resuming on 90% of its sites in England and Wales.

Since a previous announcement on 23 April, sales rates have been stable for Taylor Wimpey. During the UK lockdown, it has sold 408 homes net of cancellations. Cancellations have fallen, and its order book has increased to £2.7 billion. This compares with £2.5 billion this week last year.

Taylor Wimpey has been heavily sold since mid-February, when shares were priced at around £2.30.

UK is still facing a shortage of housing

Here at The Armchair Trader we are big believers in the fundmentals that lie behind a stock. The UK economy is in parlous shape at the moment due to COVID-19, but let’s not forget that the country was facing a major shortage of private housing going into this crisis. It was on this basis that was signalled out interest in Forterra, a stock we still like to be honest, but Taylor Wimpey fits into the same bracket.

There are some dire predictions about the state of UK house prices circulating – the Centre for Economics and Business Research said it thought that house prices would drop 13% in the UK in 2020, on the back of falling incomes and higher unemployment. According to Garrington Property Finders, prices will fall between 10% and 15%, depending on the area of the country.

For buyers who have yet to get onto the property ladder, this could present a once in a generation opportunity. While the focus has been on the fact that Taylor Wimpey is reopening, the company sells many homes to first time buyers who will be revisiting the market as prices fall. Investors will need to factor the hole lower prices will make in Taylor Wimpey’s profits, but these are holes we will see appearing across the listed house builders segment in the UK.

  • See our list of 34 recovery stocks

The lockdown has had something of an artificial impact on UK housing – yes, many transactions were cancelled, hundreds of properties were pulled off the market, but at the same time there is going to be plenty of pent up buyer demand when we emerge from this. It won’t be as ferocious perhaps as it was in 2019, but lower prices and the likelihood of government stimulus aimed at housing (e.g. stampy duty reductions), could create a busier UK housing market than some analysts anticipate.

UK house prices may fall 15% in some areas, but consider how far they have come since 2008. The average house price in the UK was around £125,000 in 2003. It is now over £250,000, even accounting for a 10% drop from COVID-19.

Accounting for that, Taylor Wimpey shares should be higher than they currently are (trading at £1.40 at the time of writing).

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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