Barratt Developments: A 30% gain and four-month high

Significantly outperforming the FTSE 100 since mid-December, our head of markets examines potential.

In normal circumstances, the housebuilders' performance of late would have been met with a warm round of applause, as cash generation, operational efficiencies and a series of tailwinds serve to benefit their numbers. Within this, Barratt Developments (LSE:BDEV) is generally seen as being the pick of the bunch.

However, all is not normal. Of course, the largest thorn in the side remains Brexit, for which the housebuilding sector has become a target for the bears as uncertainty prevails. 

The possibility of a sharp economic downturn in the worst-case scenario hangs over the sector despite its performance, and regardless of the best efforts of the companies themselves. 

Further out, some of the measures which have been introduced to stimulate the housing market may be withdrawn, and the possibility of rising interest rates would harm the sector. Those, however, are stories for tomorrow.

In the meantime, not only is Barratt making further positive strides, but it is arguably in a much stronger position to weather any downturn than it was, for example, during the financial crisis of a decade ago. 

Source: TradingView, four-hour chart (*) Past performance is not a guide to future performance

The key metrics are simple proof. Gross and operating margins are higher, net cash stands at £388 million, the return on capital employed figure stands at nearly 30% and forward sales are up by over 7%. Revenues have also increased 7%, all of which has led to an increase in the pre-tax profit number of 19.1%. 

Meanwhile, the company's financial health has resulted in the extension of special dividends, which add to a basic dividend yield of around 5%. When combined, these dividends provide a return far in excess of the average blue chip.

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There has been some recognition of these achievements with the price spiking in early trade, but the fact remains that over the last year the FTSE 100 index has eked out a 0.5% gain, during which time Barratt's shares have drifted 3.6%. 

There is therefore some irony in the fact that, whilst the sector remains out of favour, the actual performance of the share price has dropped, yet the market consensus of the company remains at a 'strong buy', as has been the case for some considerable time now.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.