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Investors tend to jump at any buying opportunity FTSE 100 stocks at a 'discount', especially during market downturns or when companies are facing short-term difficulties. I get it – who can say no to sales, right? Many of my investment decisions have been influenced by price cuts.
While this strategy can be beneficial, it's important to look beyond the price tag. Before entering these opportunities, I carefully assess the company's ability to recover. Simply buying cheap stocks can lead to huge losses if the underlying business is weak.
UK property developer The Vistry Group (LSE: VTY) caught my attention when it fell 30% last week. Real estate can be a risky industry so I'm looking at whether the stock is worth considering.
Strong foundations
Despite some volatility, the UK housing market has generally shown continued demand for new homes. As a leading developer, Vistry stands to benefit from this basic need. The company's portfolio includes different types of housing, from affordable houses to luxury buildings, which can help reduce the risk associated with certain market segments.
In addition, its large global bank provides a strong foundation for future growth, allowing it to capitalize on rising global prices. So why did the price drop?
The company cited overall construction costs as a key component of the profit warning announced last week. On Tuesday, 8 October, it was revealed that the total cost of completing the nine developments had been reduced by 10%. This could cost the company between £80m and £115m in profits.
More than £1bn was wiped off the stock price after the warning was announced. However, shares have started to recover slowly, up 8% at the time of writing.
A challenging environment
The housing market is very sensitive to economic conditions. Factors such as changes in interest rates, employment levels, and consumer confidence can have a major impact on the demand for new homes. Currently, supply chain issues are affecting the delivery of critical construction materials.
In addition to rising construction costs, Vistry faces intense competition from other major property developers in the UK, including Barratt Developments again Taylor Wimpey.
It must also overcome regulatory hurdles, planning permission delays, and environmental restrictions. All of this could drive up costs and delay projects, which could hurt the stock price.
Financial situation
Vistry is actively involved in strategic initiatives, such as mergers and acquisitions, to expand its operations and strengthen its market position. To fully assess its financial health, I considered three important financial ratios. Together, these ratings indicate that the developer is efficient at generating profits and is sufficiently liquid, with respectable capital gains.
- Return on equity: expected to be 10.3% over three years, higher than the industry average of 7.8%
- Gross profit margin: at 6.9%, this percentage increased from 5.2% last year
- Debt-to-equity ratio: with £3.34bn in equity and £645m in debt, this is a low 19%.
In my opinion, it looks like a healthy company operating in a dangerous industry. The current dip is likely to go away once, caused by external factors that increase costs. However, if these problems persist, profitability may be affected as operating costs rise.
Overall, I think it's a good opportunity, so I plan to buy the stock this week.
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