UK House Prices Are Booming– But Their Homebuilders Are Not Knowledge Leaders

Data released today showed yet another increase in house prices in the UK, albeit at a slower rate than most of last year:

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Strength in the housing market has been a positive for the stock prices of UK Homebuilders, up an average of about 36% so far this year:

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However, none of those companies manages to pass our Knowledge Leaders screen– mostly due to their inability to generate sufficient margins that are typically associated with highly innovative (and systematically undervalued) companies that we consider for inclusion in our portfolio. So, how might one gain exposure to the positive developments in the housing market in the UK? Readers will note the Home Improvement Retailer, Kingfisher, at the bottom of the table above (sorted by YTD performance). While not as impressive as its Homebuilder cousins in terms of absolute performance, Kingfisher is beginning to show more positive signs on a relative strength basis:

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The stock has spent a couple of years testing historic support/ building a base from which it has moved up since the beginning of this year. To be sure, the downtrend line is a major obstacle– but if the recent test proves successful, there is good potential for a move higher without a significant amount of resistance.

On an (intangible-adjusted) fundamental basis, Kingfisher compares well with North American peers, investing the most of all three (9.3% of sales) in advertising and firm-specific resources in order to generate a stock of intellectual property on its balance sheet that is equivalent to 17% of total assets.

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With a decent cash position and negative net debt levels, Kingfisher’s balance sheet scores in the 89th percentile versus all Knowledge Leaders.

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In addition, the company generates industry-leading gross margins as well as operating cash flow margin.

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Intangible-adjusted valuations appear pretty attractive– especially relative to MSCI World Index averages.

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Finally, sales and earnings estimates have generally improved over the last few months.

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While most of the data here seems to bode well for Kingfisher, it is important to note that the stocks of even the brightest of our Knowledge Leaders can underperform on a technical basis– a trait that would disqualify any stock from consideration for the portfolio. For now, we will wait to see if relative outperformance can persist in our point-and-figure chart shown above.

The information listed above is for example purposes only and should not be construed as the Investment Advisor’s opinion or investment outlook.

© GaveKal Capital

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