Assessing fundamentals, not short-term noise, can lead to superior stock picking
Another factor to throw into the mix is that market sentiment can often be fickle. When the economic backdrop or news headlines are positive, then it is easy for markets to take note of good fundamentals, such as better-than-expected earnings numbers, positive management guidance etc. However, if the backdrop and prevailing ’noise’ is negative, then the importance of these fundamentals often seems to fall away.
This can be illustrated by a holding in the trust, Ireland-based Cairn Homes. The housing company recently delivered numbers ahead of the guidance, but the market doesn’t seem to care. Sentiment appears to be being driven by the short-term political headlines.
Case study: Cairn Homes
Sinn Fein have a policy to deliver 100,000 social houses in Ireland. They are seeking to increase site allocation for social housing from 10% to 25% per site. There are a lot of hurdles to clear before this ever becomes policy, but in my discussions with the Cairn management team, an unintended consequence of this policy could be a reduction of homes being built for the first-time buyer. As a reminder, current rents are around 40% above the previous peak, and house prices 20% below, which tells you all you need to know about the limited supply and tightness in the housing market.
As history tells us, politicians don’t always implement the policies they promise on the campaign trail even if they do end up getting into power. It is important to be aware of any potential change to future government policy when weighing up the fortunes of a construction company such as Cairn, but we believe a full analysis of the actual fundamentals is the best way to determine the investment case for a particular stock.