Is the recent move down in the share price of Woodford Patient Capital Trust (LSE: WPCT) justified, or is it an over-reaction to trouble in the Woodford Equity Income fund? If the move is a knee-jerk reaction by the market, does the big discount to net asset value make the stock a bargain?
The shock news this month that Woodford Investment Management has suspended dealings in its Equity Income fund seems to have dragged everything Woodford-related lower, including shares in WPCT. But let’s remember the trend in the shares has been down for some time, and I think there are good reasons for that.
Probabilities playing out in the trust?
When the share price was around 75p in May 2018, I argued that the probabilities were playing out among the trust’s speculative investee companies. As long as the trust doesn’t invest in any more profitless, jam-tomorrow firms, maybe the potential Woodford believes is in the portfolio will go on to shine through. Meanwhile, the losers could already have declined sufficiently to become less of a problem.
On that basis, I was cautiously optimistic about the trust’s prospects. However, all that has changed. Woodford’s reputation as a stock-picker is being dragged down by recent events too. The reason Equity Income fund investors have been running for the hills and withdrawing their money is that one after another Woodford’s share picks have been plunging. What if the share picks in the Woodford Patient Capital Trust are no good either?
Meanwhile, at the recent share price close to 56p, WPCT trades on a more-than-30% discount to the company’s own estimate of underlying net asset value. However, Rupert Hargreaves recently pointed out that most of the portfolio is invested in private companies rather than stock-market-listed firms. Private enterprises are hard to value, even though the trust has undertaken a number of independent valuations.
What if assumptions prove to be incorrect?
What if the estimates prove to be plain wrong? On top of that, what if the upside potential Woodford thinks he’s seeing in the enterprises he’s picked doesn’t materialise? Based on recent stock-picking performance, there’s every reason to suspect that Woodford could be ‘wrong’ about the investments in WPCT.
As investors ourselves, it’s risky enough trying to pick our own speculative ‘investments’. Often, things don’t work out as we hope and we end up losing money as share prices crash for one reason or another. So why add another layer of human judgement (or potential mis-judgement) to the stock-picking process by buying shares in a trust packed full of someone else’s speculative stock picks?
Despite the lure of a fat discount, I reckon the safest way is for me to avoid the shares of Woodford Patient capital Trust. It’s also a good idea for me to avoid profitless, speculative shares altogether and to focus on companies that have already proved their ability to turn a profit and increase it each year.
