Over the past year there has been plenty of evidence and plenty of commentators telling investors to get exposure to building materials companies. The call has been a good one with stocks such as Boral Limited (ASX: BLD), CSR Limited (ASX: CSR) and Fletcher Building Limited (Australia) (ASX: FBU) all outperforming the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).
Over the past month however the above three stocks have all witnessed falls in their share prices of between 4% and 10%, compared with the index which has essentially been flat. These falls could suggest that investors may be starting to lose conviction in building material stocks. Here are three reasons why that could be the case.
1) Weaker-than-expected data. Home building approvals data slipped again in April, making it the third consecutive monthly decline. While overall the approval rate is still 16% higher than a year ago, some investors are likely to be questioning if the trend is starting to reverse.
2) Profit taking. Building material stocks have had a good run and naturally some investors will be rotating out of their top-performers and locking in capital gains in the process.
3) Valuation. The building cycle is notoriously cyclical. For that reason investors need to use a “look-through” or mid-cycle earnings base when estimating value. It’s possible investors are starting to think that the top of the earnings cycle is not too far away and as such they are re-adjusting their valuations.
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*Extreme Opportunities returns as of June 5th 2020
Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
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