One attractive growth stock I’d buy ahead of Purplebricks Group plc

Shares in Purplebricks Group plc (LON: PURP) are up 240% since listing but Edward Sheldon believes he may have found a less risky small-cap alternative.

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Whether it’s the company’s ‘hybrid’ business model, or its quirky ads on television, online estate agent Purplebricks Group (LSE: PURP) appears to have caught the imagination of many investors since its IPO. Floating at 100p back in late 2015, the share price surpassed 500p in July this year, an 18-month gain of an incredible 400%. However, in the last two months, the stock has pulled back by around 30%. Is now the time to get in, or should investors steer clear?

Show me the profits

I have to admit, there are aspects of Purplebricks’ business model that look interesting, to me. Whereas traditional estate agents charge a fee of around 1%-3% to sell a property, Purplebricks charges just £849, or £1,199 for London properties. Furthermore, the cost structure of the business also looks attractive, as unlike traditional estate agents, it doesn’t require an extensive, a fixed-cost high street estate to sell properties. 

However, the key issue stopping me from investing in the company right now, is the lack of profitability. You see, while Purplebricks’ revenue increased substantially last year from £18.6m to £46.7m, the company generated a net loss of £3m. City analysts forecast a further increase in the top line to £96.8m this year, but another sizeable net loss of £14.5m is anticipated.

After losing money on unprofitable businesses in the past, one of my general rules these days, is to refrain from investing in companies until they become profitable. Sure, this means that I may potentially miss out on some big gains, but at the same time, I’ve found this approach helps me reduce the chances of investing in a dud. At the end of the day, successful investing is as much about limiting big losses as it is about making large gains.

Furthermore, with a current market cap of £960m, Purplebricks’ valuation doesn’t leave a huge margin for error. With that in mind, I’ll be avoiding shares in the hybrid estate agent for now.

A lower risk alternative?

One company that is generating robust profits right now is £392m market cap Volution Group (LSE: FAN), a UK-based supplier of ventilation products to the residential and commercial construction markets in the UK and Europe. Ventilation may seem like a boring business, but that doesn’t mean the sector isn’t capable of generating attractive investment opportunities. Indeed, Volution Group shares have risen nearly 30% in the last year alone.

The ventilation specialist released its final results for the year to 31 July today, and the numbers look solid. Revenue for the year increased 19.8% to £185.1m, while adjusted profit before tax rose 10.3% to £34.6m. Adjusted basic and diluted earnings per share came in at 13.6p, a 7.9% rise on FY2016, and the company declared a full-year dividend of 4.15p, a 9.2% hike on last year’s payout. Chief Executive Ronnie George gave an upbeat assessment of the company’s outlook, stating: “The Board is confident of delivering good progress in this financial year.”

Volution shares currently trade on a P/E of 14.8, with a dividend yield of 2.1%, metrics which look attractive in my view, given the company’s momentum. With the share price trending upwards over the last year, I believe further gains could be on the horizon.

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.

Edward Sheldon has no position in any 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.

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