Why I’d sell this 33% riser and buy the Morrisons share price instead

G A Chester sees high risk in this high-flying stock, but good value in Wm Morrison Supermarkets plc (LON:MRW).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Purplebricks (LSE: PURP) has disrupted the traditional estate agency market with its online fixed-fee model. Meanwhile, Morrisons (LSE: MRW) has successfully adapted its business in the face of supermarket-sector disruptors Aldi and Lidl.

Here, I’ll discuss the factors that have persuaded me the recent strong rise in the Purplebricks share price is a good opportunity to sell, and why I’ve concluded the weakness of the Morrisons share price has created a good opportunity to buy.

Renewed focus

Purplebricks’ shares hit a multi-year low of 90p in May, but began a sustained recovery from early July. This followed the release of the company’s annual results. Having previously announced the closure of its Australian business, it revealed it’s also ending its equally disastrous expansion in the US.

Clearly, investors have welcomed the news, and the company’s renewed focus on its established UK operations, and smaller Canadian business. Management reckons Purplebricks is now in a position to “deliver profitable growth for shareholders.”

Sustainability

The company trumpeted UK revenue growth of 21% to £90m for the year, and an operating profit of £5.3m. However, if you look behind the 12-month figures, you’ll find revenue slumped 13% in the second half, compared with the first half, and the business swung to an H2 operating loss.

I’m not convinced this is entirely down to the current economic and political uncertainty in the UK, because I’ve long questioned the sustainability of the company’s no-sale-still-pay business model. New chief executive Vic Darvey recently revealed he’s considering moving away from the model, which he admits may not be working in some areas of the UK.

The market is rating Purplebricks as a high-growth stock. At a current share price of 120p, it’s valued at £368m, or four times revenue. This is a higher rating than Boohoo, for example, which is growing both revenues and profits at a rate of knots. As such, I see Purplebricks as overvalued, and possibly grossly so.

Turnaround

A third consecutive year of strong sales and profit growth suggests Morrisons is adapting well to the disruptive influence of discounters Aldi and Lidl, and what it calls “an ever-changing British retail scene.”

The turnaround followed boardroom changes in 2015, and a number of smart strategic moves by the new management team. Chief executive David Potts isn’t resting on his laurels. He’s stated: “We remain confident that Morrisons still has many sales and profit growth opportunities ahead, and expect that growth to be meaningful and sustainable.”

Growth engine

I put Morrisons success down to good management and innovation in its core operations, and a canny drive into wholesale. Deals with the likes of Rontec, Sandpiper, MPC Garages, McColl’s Retail and Amazon have provided the company with a growth engine for the future.

Morrisons and Amazon, for example, announced earlier this year they’re expanding their ultra-fast, same-day, online grocery home delivery service to many more cities across the UK. Amazon’s UK boss commented: “We are committed to growing our grocery business … and our relationship with Morrisons is an important part of that long-term growth.”

At a share price of 188p, Morrisons trades on 14 times forecast earnings, with a prospective 3.7% dividend yield. I think this represents good value and that the company could even become a takeover target.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended McColl's Retail. 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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »