Before the fateful Brexit vote last week, I was doing one of my regular searches for shares with good growth prospects and what do you know? Two of them have been hit hard by the referendum result. Does that mean theyre no good now, or are they even better bargains?
Housebuilder Bellway (LSE: BWY) was looking very good on a forward P/E of nine with a PEG ratio for this year of 0.3 (where growth investors typically see 0.7 or less as a good sign) that was when the shares were changing hands at around 27 apiece, and since then theyve lost 37% to just 1,700p, as fears of a housing collapse grip the Citys traders.
Now, there is a big risk to the UKs housing market, for sure, at least partly from European investors who will be a lot less keen to risk their money here. But long-term profits for housebuilders do not depend on short-term property prices, and if demand falls, prices will fall and the houses will still be sold to grateful occupants, I hope.
But that means land prices would fall too, and cash-rich builders like Bellway should be able to top up their land banks at low prices just as they did during the last financial crisis. Long term, I reckon housebuilders, including Bellway still show great growth potential.
Support services group Interserve (LSE: IRV) has had a horrible time, with its shares losing 56% over the past five years they had been rallying slightly, but have fallen back 15% since Thursday, to 266p. But the firms earnings per share have actually been picking up over the past few years, and an expected standstill over the next few years puts the shares on a P/E of only a little over four and thats with a forecast dividend yield of 8.6%!
So, why so cheap? Well, after Interserves acquisition of Initial last year, its net debt rose to 309m, and thats a lot for a company with a market cap of 385m and pre-tax profit of just 79.5m. Coupled with some big one-off costs this year, I think theres a good chance the dividend will be cut, even though its currently reasonably well covered by forecast earnings.
But the current super-low valuation means Interserve could still offer a decent yield, and with the Citys brokers putting out a strong buy rating on the shares, I see good long-term growth potential even if we could still see another volatile year in the short term.
You dont need me to tell you that banking sector shares have collapsed since the referendum, and the short-term uncertainty means theres no surprise there at all. Lloyds Banking Group shares are down 28% and Barclays are down 31%, which I think is seriously excessive, but the one really takes the biscuit is Virgin Money (LSE: VM), whose shares are down a massive 42% since the referendum, plummeting to 212p.
Sir Richard Branson had said he expected Virgin shares to take a pounding in the event of a leave resultand that there could be job losses, and the challenger bank does face danger from its focus on mortgage lending should we really see a housing slump. But if the bank can pull through the short-term pressure (and I see no reason why it shouldnt) then it could have some serious longer-term growth prospects.
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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.