The Motley Fool

Was Neil Woodford the only weight on the Purplebricks share price?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Businessman looking at a red arrow crashing through the floor
Image source: Getty Images.

Purplebricks (LSE:PURP) has been intimately entwined with Neil Woodford’s recent investment management career. This means that the end of that career in its recent form has significant implications for the company share price. The question is, well, what?

One way of reading it is that as the clouds clear under the new fund management then the Purplebricks price will recover. There is, after all, something of an overhang there, and there have been substantial sales. The other is that there’s something else to worry about and I’m in that second camp.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

The company was backed by Woodford’s funds early on, and it was one of the major paydays when it listed then soared. So far so good, a justification of the investment style. There’s nothing wrong, after all, with the idea of invading a business as staid as estate agency. Maybe not having to pay for high street shops, combined with a flat fee upfront rather than commission system, will work? But then the cracks started to appear.

The first was concern over revenue recognition. So, if an upfront fee is paid then when does that actually become income that profits can be calculated from? It’s not when the cheque is received, for there’s still much work to be done. We also shouldn’t insist that the sale must have gone through before recognition as, after all, it’s not a ‘no sale, no pay’ fee. Worries about this produced the first setback for the Purplebricks share price.

Then there was the foreign expansion that blew up. And then this summer and autumn, we’ve seen the Woodford effect in reverse. The problem was having too much in illiquid stocks to pay off redemptions – always a possible problem in an open-ended fund. That meant having to sell down, aggressively, stakes in more liquid holdings – Purplebricks being one of those. From June to September the stake went from 29% to 17.64%. That’s a lot of selling and it would, in the absence of anything else, have dropped the share price.

Which brings forward our question – is it just that selling depressing it? And now that the funds are under new management, no longer gasping for liquidity, will there thus be a bounce?

There could be, but I doubt it. For I’m worried about those two more basic things. Firstly, the essential idea itself. Companies work better when incentives are aligned. Payment by results is the way to motivate salesmen and thus a percentage fee on a sale seems to me the right way to be running an estate agency. I think this will become more obvious during the next housing price downturn.

Secondly, that revenue recognition thing. Because of the past movements in that, what is booked as a profit and when, we don’t really know whether the model even works today.

There could be a Purplebricks share price bounce as the Woodford fund selling pressure lifts. But I’m willing to bet that there won’t be for more fundamental and underlying reasons. Steer clear.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Neither Tim nor The Motley Fool UK have a 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.