There are a number of ways for me to play the buoyant British housing market. I’ve chosen to do this by investing in FTSE 100 housebuilders Barratt and Taylor Wimpey and by snapping up brickmaker Ibstock. I think another good way to play this theme could be by buying penny stock Purplebricks Group (LSE: PURP). But should I buy it today?
I haven’t always taken a bullish stance on this penny stock. I worried about whether or not it was spreading itself too thin through rapid international expansion. The huge strain this was putting on Purplebricks’ balance sheet and what this meant for future profits was another concern of mine.
There’s strong evidence to suggest that the online property listings expert has turned things around, however. Purplebricks finally put years of losses behind it and recorded and pre-tax profit of £3.6m for the financial year to April 2021. This was driven by a 13% improvement in annual revenues, which clocked in at £90.9m.
A lean(er) machine
Pleasingly, Purplebricks has also reined in its plans for global domination over the past year. After exiting the US and Australia a couple of years back, the penny stock sold its Canadian division last summer. It means that Purplebricks can concentrate on exploiting its core UK marketplace more effectively and with a stronger balance sheet. The disposal of its Canada business left the company with £74m in cash as of the end of April, up 139% year-on-year.
Purplebricks’ revenues have popped recently for a couple of key reasons. Firstly, the homebuying boom in Britain has turbocharged demand for its online services. I fully expect first-time buyers to keep business bubbling too as low interest rates, huge government support like Help to Buy, and mortgage rate wars among Britain’s lenders are likely to remain in place. This should continue to fuel new instructions from sellers.
Moreover, I expect the online business model to enable it to thrive as the broader e-commerce market lifts off. Britain has the third-largest online shopping sector on the planet. And whether it be for shoes, groceries, cars or houses, virtual shopping is growing strongly in the wake of Covid-19.
Hit the bricks!
All that being said, there are a few reasons I’d be reluctant to buy Purplebricks shares today. The first of these is the stock’s sky-high valuation. At 71p each, the Purplebricks share price commands a forward price-to-earnings (P/E) ratio of 55 times. Such a high rating could prompt a share price correction if news flow surrounding the company begins to deteriorate.
And there’s a few reasons why this could happen. The withdrawal of the stamp duty holiday could have a significant impact on homebuyer demand in the short-to-medium term, for example. A fresh economic downturn because of Covid-19 and Brexit could also threaten the penny stock’s operations. I think there are much more attractive low-cost UK stocks to buy right now.
Royston Wild owns shares of Barratt Developments, Ibstock, and Taylor Wimpey. The Motley Fool UK has recommended Ibstock. 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.