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One Neil Woodford growth stock I’d buy, and one I’d sell

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Ups and downs are part and parcel of investing in the stock market and ace investor Neil Woodford suffered a torrid 2017. A number of his biggest holdings crashed, some of his small speculative stocks went under, and several of the companies he’s backed came under attack from bearish analysts, including short-sellers.

Of course, it just goes to show that even a veteran investor with an enviable long-term record of outperforming the market can go through difficult spells and make some poor stock choices. Today, I’m looking at one Woodford stock I’d buy, and one I’d sell.

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Growing business momentum

Specialist healthcare firm BTG (LSE: BTG), which is a member of the mid-cap FTSE 250 index, ranked at number 18 in Woodford’s flagship Equity Income fund at the last reckoning, with a weighting of 1.8%. It was one of his better performers in 2017, rising almost 30% over the course of the year.

Woodford has been an investor in the company for many years and seen it progress via a number of key products across its interventional medicines pipeline. A fund update for April last year noted: “As so often happens with early-stage companies, the development process has taken longer than initially expected, as has the process of market penetration once products have made it to market.” However, BTG provided mounting evidence of growing business momentum through 2017, and the share price responded accordingly.

City analysts are forecasting the company will deliver a 27% rise in earnings to 29.3p a share for its financial year ending 31 March. At a share price of 745p, this gives a price-to-earnings (P/E) ratio of 25.4. While this is a relatively high multiple, factoring in the earnings growth produces a price-to-earnings growth (PEG) ratio of 0.9. This is on the good value side of the PEG fair value marker of one and suggests the stock could be a great buy for the growth on offer. I rate it as such and think it could put in another good performance through 2018.

An accounting game more than a company?

I’m a lot less keen on another of Woodford’s FTSE 250 stocks, namely IP Group (LSE: IPO). IP provides capital and other assistance to a large portfolio of early stage businesses, which are mainly founded on research coming out of its partner universities. It’s the 10th largest holding in Woodford’s Equity Income fund, with a weighting of 2.4%.

Last month, IP came under attack in an extensive report by US short-seller J Capital Research (JCap). The report, which you can access at JCap’s website, is not without errors and some contentious interpretations, but I believe the broad thesis has substance.

JCap points out that since 2008, IP has invested a total of £346.3m in its portfolio companies but only realised £40.9m from disposals, with other gains being paper-only. It suggests: “IP Group is an accounting game more than a company and has an atrocious track record of delivering bankable returns.”

JCap put a valuation of around 75p on the shares. They’re trading at 134p as I’m writing, and I view the bear case as sufficiently compelling to rate the stock a ‘sell’.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended BTG. 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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