Why I’d sell this growth stock for a Neil Woodford-backed flyer

After returning 300% in just five years, I’d ditch this high-flying growth stock for an even more impressive Neil Woodford holding.

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With a market cap of only £475m and a single analyst covering it, most investors have probably never heard of hotel group PPHE (LSE: PPH). Yet the company, which owns the art’otel brand and runs the Park Plaza brand in Europe, has performed incredibly well in recent years.

And this growth has continued through 2017 with the company reporting a stellar full-year trading update this morning. Revenue rose 19% year-on-year thanks in large part to new hotel developments beginning trading.

But management wasn’t just relying on new rooms to drive rises as strong economic growth and a rebound in tourism across Europe drove like-for-like revenue up 10%. The aforementioned economic tailwinds and weak sterling also helped increase like-for-like revenue per available room, a key industry metric, by 11.5% to £92.4.

However, despite another solid year under its belt, I’m not in any rush to buy shares of PPHE. The main reason is one outside management’s control, namely the macroeconomic environment across Europe. While animal spirits appear to have been unleashed in the EU, PPHE has a high reliance on London and emerging issues such as slow wage growth, rising inflation and the Brexit process all create a bit too much uncertainty to make me comfortable owning such a cyclical business.

This is especially true because, unlike its larger and almost completely franchised peer Intercontinental Hotels Group, PPHE owns some of its hotels outright in addition to managing others and franchising out some. When property markets are booming as they have over the past few years, this provides a nice earnings uplift as property valuations rise, but should the market crater, the reverse would also be true.

Add in a non-bargain valuation of 18 times earnings, a gearing ratio of 57.2% as of June, and I see a few reasons for bearish investors to behave cautiously as regards PPHE, despite continued double-digit revenue growth.

Lawyers making a bundle

Instead, I’ve got my eye on fast-growing, Neil Woodford holding Burford Capital (LSE: BUR). The group has a pretty unique business model for a listed company in that it provides funding for commercial litigation and then takes a cut of any proceeds from the case.

This business model has proven a hit with corporate clients who hate to spend big on lawyers for cases that can drag on for many years and cost many millions in legal fees. But this patience has worked out incredibly well for Burford with the group’s income rocketing over the past five years from $19.5m in H1 2013 to $175.5m as of H1 2017.

Looking forward, there are good signs rapid growth can continue as Burford continues to raise additional funds through re-investing earnings, issuing debt and growing its investment management side of the business. In fact, in calendar year 2017 the company invested $1.3bn in new commitments, more than triple the figure in 2016.

While earnings are likely to be lumpy, particularly in 2017 as a single case returned an astonishing five times return on the sale of just a 25% stake in the outcome, I think Burford’s market-leading position in a growth industry, proven management team and strong financial position make it very attractive company over the long term.  

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.

Ian Pierce has no position in any of the 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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