The Persimmon (LSE:PSN) share price climbed 18.6% in July, making it the best-performing FTSE 100 stock last month. Despite this, the shares are still 50% down from their pre-Covid-19 levels.
Itâs therefore natural to wonder whether there might be a buying opportunity here. After a long period in the wilderness, is it time for the stock to bounce back?
Housing boom?
The biggest reason Persimmon shares soared last month is the change in the UK government. The Labour Party has made big promises to build more houses and get people onto the property ladder.
Thatâs good for housebuilders in general, not just Persimmon. Taylor Wimpey, Barratt Developments, and The Berkeley Group all saw their share prices jump by more than 10%.
None was up as much as Persimmon though. Thatâs partly because they werenât down as much in the first place, but the market clearly seems to think the company has more to gain than its rivals.
Yet Iâm somewhat sceptical. Iâm staying away from the UK housebuilding sector at the moment â and if I was to invest in this space, this isnât the stock Iâd be looking to buy.Â
Average selling price
One of the things that differentiates Persimmon from its rivals is its average selling price. At £255,756, itâs lower than Taylor Wimpey (£356,000) and Barratt Developments (£307,000).
This is partly why the company might have more to gain from Labourâs policies. As more people become homeowners/tenants, demand for relatively cheap housing is likely to increase.
The downside is this makes the business vulnerable when support gets withdrawn. High exposure to the Help to Buy scheme meant Persimmon was hit hard when it was discontinued.
Iâm not convinced a near-term benefit from government initiatives is enough to justify buying the stock for a long-term investment. And Iâm not actually sure about the short-term bit, eitherâ¦
Balance sheet
Another big issue with Persimmon is its financial position. Itâs investing for growth, but this looks likely to put the business in a position where it has more debt than cash on its balance sheet.
In theory, thereâs nothing wrong with that. But itâs worth noting that neither Barratt nor Taylor Wimpey is anticipating being in this position in the near future.Â
That means Persimmonâs rivals are likely to be in a stronger position financially if and when the new government schemes roll out. And this might put the company at a competitive disadvantage.
Iâm not convinced the firm has the most to gain from a surge in housebuilding. If thatâs the main reason to buy the stock at the moment, then Iâll leave this one for others.
The elephant in the room
Persimmon isnât on my list of FTSE 100 housebuilders to consider buying. Right now, though, I actually have reservations about the whole lot.
All of the major builders are under investigation from the Competition and Markets Authority for potential collusion. Iâve no idea what the outcome of this will be â and thatâs a big risk.Â
Maybe it will be nothing, but Iâve no way to know that and the prospect of unspecified liabilities is enough to put me off. Thatâs especially true when I think there are better opportunities elsewhere.
The post Why the Persimmon share price soared 18% in July appeared first on The Motley Fool UK.
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More reading
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3 reasons why I’ve been buying more Persimmon shares in July
Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
