UK Housebuilders - a serious case of undervaluation?

Although prospects seem rather gloomy for UK housebuilders, with house prices already having suffered 2/3 months of falls, and recently rising costs of mortgages, including steep rises for those whose fixed-rate mortgages are terminating, the fall in share prices of UK housebuilders appeared to me way too steep. For example, Barratt Developments (BDEV) had fallen from a 2007 peak of 1174p to 320p. This lead me around 10 January to examine the latest data on assets, liabilities, and current market capitalisations, but using the tough criteria suggested by Benjamin Graham of comparing only gross current assets (ie ignoring non-current assets) with gross total liabilities. This gave a net current asset value (NCAV) of £1.88bn. The market capitalisation of BDEV at 320p = £1.11bn. That was good enough for me. I bought some BDEV at 325p on 10 Jan. Other housebuilders also had NCAV > market capitalisation - although not as dramatic - and I bought some Taylor Wimpey (TW) at 160p on Jan 15. Tonight BDEV closed at 477p and TW at 204.75p. Not surprising that directors in all the UK housebuilders have been actively buying shares in recent months.

2007: a difficult year

My first year of relative underperformance since 1998, down 8.7% compared to the FTSEAllShare's positive 5.5%. Partly explained by the bad time smaller companies have had on the UK market - the FTSESmallCos being down 9.9% - but much due to a too early rush into financials, including the doomed Northern Rock .... presumably their ex-directors who made heavy mid-summer purchases of shares in the summer must look upon 2007 as a year to forget.

I was also too optimistic about the direction of the market which not only ended the year rather flat, but promptly began to plunge steeply in the first weeks of 2008.

Mid-Cap Mullering

Two trading days into December and lots of damage. Here is a message from an English investor/broker whose views I greatly respect (full message here):

The mid cap stocks have been thoroughly mullered in the past two or three weeks.

Companies with excellent track records, strong finances and trading down 35% - 50% from their highs of the year.

The ones Im watching and starting to pick up include KIE

For god's sake, what has a company to do? Cash of c£4 per share puts them on a historic PE of 7 ex cash and 6 if you believe the forecasts. Remember that the company announced results in late Sept (excellent) and positive), has had an IMS in late Oct (excellent) and an AGM statement the other day (excellent). Yet the stock continues to bomb.

Someone somewhere is offloading a lot of the mid cap names and with volumes at rock bottom the price just tanks. Mind you, try buying at the shown price in anything like "sensible" volumes and you see it instantly correct.

Others that are mystifying me (okay so they are partly construction related but are top quality companies nevertheless) and trade on daft multiples:

KLR - world leader in ground works. Strong trading figures.
SHI - leader in insulation materials and oft talked of as a target for St Gobain
CHTR - world leader in welding and compressors (seeing strong demand from O&G/Mining capex in particular)

Even WOS looks a good long term buy, if it ever gets back to the 620p or so it reached last week.

Sometimes it makes no sense. I'm not rushing in, just picking up some quality quality with proven track records, highly regarded in their sectors with solid financials at what look like daft prices.

I couldn't agree more.

Notes:
KIE = Kier
KLR = Keller
SHI = SIG
CHTR = Charter
WOS = Wolseley