Did Neil Woodford make a huge mistake selling Softcat shares?

Neil Woodford sold his holding in Softcat plc (LON: SCT) recently. Has the portfolio manager made another mistake?

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Many investors have withdrawn capital from Neil Woodford’s funds recently on the back of a sustained period of poor performance. As a result, the fund manager has had to make adjustments to his portfolios. This has included selling several stocks such as Softcat (LSE: SCT) and Equiniti (LSE: EQN). Was Woodford right to sell these stocks? Let’s take a closer look.

Softcat

UK IT infrastructure specialist Softcat is a company that I have historically been very bullish on. For example, I highlighted the stock as a top technology stock for 2017 in January last year when it was trading under 300p. Today, the shares change hands for over 714p, so it’s likely Neil Woodford made a decent profit when he sold the stock recently. But should he have held on?

A brief trading update for the quarter ending 30 April released today suggests he may have been better off doing so. Indeed, the update revealed that momentum within the business is strong at present and that the board is confident that the company will deliver full-year results that are “ahead of expectations.” The group advised that “market conditions and customer demand have both remained strong” and that it still has a “considerable market share opportunity.” The stock has jumped 8% today.

But what about the valuation? Maybe Woodford sold as he thought the stock was too expensive? Well, City analysts currently expect the group to generate earnings of 23.4p per share for the year ending 31 July. At the current share price, that places the stock on a forward P/E of 30.1. While that’s clearly not a bargain valuation, I’m not sure it’s overly expensive either, given Softcat’s recent growth and strong financials. For example, in the last three years, revenue has grown 65% and net profit has increased 46%. Return on equity last year was 46% and the company has no long-term debt. These numbers warrant a premium valuation, in my view.

I don’t own Softcat shares but if I did I wouldn’t be selling just yet. With demand for cybersecurity and networking solutions likely to remain strong in the future, I’d be holding on for further gains over the medium-to-long term.

Equiniti

Woodford’s sale of Equiniti shares also surprises me. It provides technology to a broad range of financial services companies and has a market-leading position in share registrar services in the UK, providing investors services for around half the firms in the FTSE 100. And after the key acquisition of US-based Wells Fargo Shareowner Services in February, the group looks to have attractive growth prospects internationally.

Equiniti recently advised that 2018 had started well, and that it was building on the momentum established last year. It also noted that it had recently made several new clients wins including Bodycote, Hiscox and Rentokil in the UK, and Mastercard in the US.

Woodford most likely made a decent profit on the sale of his Equiniti shares, as he doubled up on his holding back in mid-2016 when the stock was trading at a much lower price than it is today. Yet with the stock currently trading on a forward P/E of just 16.6, I believe there could be further gains to come for patient shareholders. If I was a shareholder, I wouldn’t be selling just yet.

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 owns shares of Equiniti. 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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