Drax Group (LSE:DRX) and Persimmon PLC (LSE:PSN) have been added to broker Liberum’s UK value stocks portfolio, but the reasons could not be more different.
One is seeing earnings outstrip its share price, while the other has seen its market value dwindle as profits have been reasonably steady.
Power generator Drax has been the one surging higher on the boost to its earnings from rocketing electricity prices.
Persimmon’s share price meanwhile has tumbled due to concerns about where the UK housing market is heading.
So, for wildly different reasons, both now fit Liberum’s value screen of a trailing PE ratio of under 12.5, price to book ratios below 2.5, a market cap of less than £6bn and low debt.
Results from the two illustrate how the performance of the pair has diverted but both have ended up in the same portfolio.
At 650p, Drax‘s share price is within shouting distance of its five-year high of 812p.
Chancellor Jeremy Hunt’s windfall tax did take some zip out of its sails but a December trading update forecast adjusted earnings this year would still be more than £681mln or higher than the top end of market forecasts.
In 2020, adjusted earnings were £412mln, highlighting the extraordinary boost Drax has seen over the past 12 months following the start of the Ukraine war.
What happens when energy markets normalise is the main issue going forward.
For Persimmon, its appearance in the value screen reflects a 44% drop in market value over the past 12 months, comfortably outshooting an 8% drop in half-year profits at £440mln.
According to Liberum, that puts the trailing PE ratio at 11, with the housebuilder valued at just 1.3 times book value.
But these are ratios that look backwards and a trading statement from Persimmon last week indicated housing demand had been notably weaker in the second half of the year.
So some adjustment to catch up with the current reality seems likely with a yield of 15%, based on its last two shareholder payouts (235p), also pointing to trouble ahead.
Any improvement in the UK economy and potentially the mood might quickly change, but caution seems the market's watchword for now.
Persimmon shares were up 0.3% today at 1,312p, while Drax added a similar percentage at 652p.