To start analysing a sector in SharePad, follow these easy steps:

1. Select a list such as the FTSE 350.
2. Click on the Filter button in the List view and select Apply sector filter.
   
   
   
3. Then choose the sector you want to look at. In this instance I've chosen the Home Construction subsector to look at the shares of housebuilding companies.
   
   
   
4. Once SharePad has filtered the list so show the sector constituents, add them to a new portfolio (watchlist):
   
   
   
5. Give your portfolio a name such as Housebuilders


You are now ready to begin analysing the sector. I find it easier to create a new List setting with the columns I want.



Now let's get on with analysing the housebuilding sector in SharePad.

Valuations

I've created a table to give me a snapshot of the valuation of the housebuilding sector. There are lots of different valuation options in SharePad for you to choose from. Here, I've kept things fairly simple by looking at price earnings (PE) ratios, price earnings growth (PEG) ratios, dividend yields, and price to net asset value (P/NAV).

On a PE basis, the shares don't look particularly expensive at first glance with forecast PE ratios ranging from just over 8 times to just under 13. That said, housebuilders profits are cyclical and move from peaks to troughs. After a strong period of profits growth it would be surprising to see these shares trading on high PE ratios as most investors would expect growth to slow down. (For more on how to analyse cyclical sectors click here.)

The PEG ratio compares the forecast PE ratio with the expected rate of earnings per share growth. Many of the Housebuilders are trading at a PEG below 1.0 which is usually considered cheap. However, it is always worth remembering that analysts are very good at predicting the future especially in cyclical sectors which might suggest caution when using PEG ratios.

The sector is offering some very high forecast dividend yields which look very attractive compared with the yields on government bonds and the interest rates offered by savings accounts. However, caution is needed here too. Many of these companies are paying quite a small proportion of their profits as a regular annual dividend - an amount that can probably be sustained even if profits fall from current levels - and then topping this up with special dividends.

In the last recession, dividends were cut or scrapped entirely. This may explain why companies are paying special dividends whilst the going is good.

Many professional analysts value housebuilding shares by comparing the share price with the net asset value (NAV) per share. Using NAV makes sense when a company's assets can be turned into cash relatively quickly. In the case of a housebuilder, the bulk of its NAV will be made up of unsold houses already built and plots of land less any debts. Sometimes, the net tangible asset value (NTAV) per share is used which takes away the value of intangible assets such as goodwill.

During bad times, when the housing market is depressed, house builder shares can be bought for less than their NAV per share. When times are good and investors are optimistic about the prospects for future profits growth the shares can change hands at significantly more than NAV per share.

When looking at an individual housebuilding company you should look at the history of its P/NAV valuation and see where the shares are trading relative to its historic range. If it is at the low end and the outlook is good then that might indicate a potential buying opportunity. A valuation at the high end might signal that shares might not offer much profit potential.

The history of Taylor Wimpey's share price compared with its NAV per share is shown in the chart below. As you can see, its shares are currently changing hands for considerably more than its NAV which is telling us that the shares are very popular with investors at the moment. The same is true for most of the sector.

I'll have a lot more to say on P/NAV later when I'll show you how to try and work out the right P/NAV multiple for a house builder.

Sector Profit Margins

SharePad allows you to look at a financial performance measure across a sector for the last ten years. Here we are comparing each company's current EBIT margin with its ten year history. This allows us to see the performance of companies throughout an economic cycle where profits boomed, slumped (in 2008-09) and have then recovered again.

As you can see, most companies have EBIT margins that are higher than or close to their previous peaks. For all I know, these margins could go higher and be sustainable for many years ahead. What you can take away from this is that housebuilders are currently doing very well compared with history.

A similar pattern is repeated when looking at ROCE, although Barratt and Redrow still have ROCEs which are considerably lower than the last peak ten years ago. There may be good reasons for this such as different business conditions or it may be a sign that their profits still have some room for improvement.

Barratt is again some way below its peak ROE, although many of its peer are close to or above their ten year highs on this measure. I'll have more to say on ROE in a little while as it has a big say on the valuation of housebuilders.

Net debt to EBITDA

Debt levels, as measured by the net debt to EBITDA, are very low and have been improving. Most companies look to have very strong finances.

As with all companies, you need to be aware that the amount of debt on a balance sheet is only a snapshot on one day of its financial year. Average net debt levels throughout the year are often higher (How much debt and cash does a company really have?). Some builders often buy land on credit. Barratt Developments has nearly £1bn of land creditors which are not accounted for as debt but in reality they are a form of debt. The company, to its credit, is very open about this in its annual report.

Current ROE's are sustainable forever

If we take the current ROEs - which are close to peak values for many in the sector - then some of the shares are undervalued on this method. Persimmon shares look fully valued and Taylor Wimpey shares are slightly overvalued. That said, this analysis seems to be telling us that quite high ROEs - higher than historical averages - have been factored into current share prices.

But what if these returns aren't sustainable, which history suggests they are not.

Valuations based on 5 year average ROEs

Based on the average ROE of the last five years when profits and ROE have generally been increasing all the shares with the exception of Crest Nicholson look overvalued.

Valuations based on 10 year average ROEs

Based on ten year average ROE's which take into account the last recession of 2008-09 the shares look very overvalued.

Remember, this is just an overview of the sector. To work out whether the shares are worth buying or not you should do some in-depth research into the company. For more, check out my article on Taylor Wimpey here.

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This article is for educational purposes only. It is not a recommendation to buy or sell shares or other investments. Do your own research before buying or selling any investment or seek professional financial advice.