Why Taylor Wimpey could be one of the best value stocks to buy today

Investing in value stocks can mean bucking the trend. I think of the house builder Taylor Wimpey (LSE: TW) could be a good example of this. This FTSE 100 The stock has fallen 35% over the past two years. Sales have slowed and profits are expected to drop 50% this year. Ouch.

To add to the worries, higher mortgage rates have put pressure on house prices. According to major lenders, prices have fallen.

There are clearly some risks. But as billionaire investor Warren Buffett once said, “Spreading fear is your friend as an investor because it provides cheap buys”.

I think Taylor Wimpey could be one such bargain. This is why.

Strong position

Buffett has often said that he likes to buy “Quality stuff when marked down”. Word quality is important here. What I don’t want is to invest in a cheap stock because it has serious problems.

Fortunately, Taylor Wimpey looks set to weather tough trading times.

The company’s new 2022 results show a pre-tax profit of £828m, up from £680m in 2021. The operating profit margin for this year is almost 19%, and the business continues to generate plenty of cash reserves.

Although management said new sales had slowed from last year, the business still had an order book worth £2,154m (8,708 homes) as at 26 February. That has been sold for more than six months.

Taylor Wimpey’s finances were also buoyed by a net cash balance of £864m at the end of last year. Although some of this money may be needed to finance the purchase of land, this cash should reduce the risk of short-term liquidity problems.

Cheap enough to buy?

Cyclical businesses like homebuilders often look cheap when profits are near their peak. The reason for this is that the market has started to price in the risk of slowing down.

I can see this with Taylor Wimpey. Based on last year’s earnings, the stock is trading at a price-to-earnings (P/E) ratio of just six.

Looking ahead, the picture changed. The brokerage’s latest forecast for the year suggests earnings will fall by 50% to around 10p per share. Based on this estimate, the stock is priced at a more expensive rating of 12 times 2023 forecast earnings.

My analysis of Taylor Wimpey’s past performance suggests that its earnings forecast for this year may mark a low point for the business.

I am also encouraged to see the stock trade Net asset value is 126p per share. Again, this is a classic value indicator favored by Warren Buffett – buying stocks below their value.

Why am I buying now?

Of course, there are no guarantees here. Predicting the behavior of the UK housing market is not easy.

However, investing in stocks always carries some risk. I think Taylor Wimpey’s shares have been priced for bad news and are likely to deliver an attractive return from current levels.

The company is still expected to pay a 9p dividend this year, giving the stock a return of more than 7%.

Looking further ahead, I expect growth to pick up again in 2024 or 2025, when the housing market recovers.