Since the turn of the year, shares in Purplebricks (LSE: PURP) have beaten the FTSE 100 by an incredible 60%. That’s at least partly because the estate agent is forecast to undergo a major transformation in the next couple of years as it moves from loss to profit. In fact, its earnings per share are expected to increase from minus 2p last year to over 3p per share next year.
Looking further ahead, Purplebricks has real potential to gain a bigger foothold in the UK estate agency space. That’s because it offers a low-cost service that’s likely to prove popular among homesellers. And with Purplebricks being a disruptive force in what remains a fast-growing market, its profit potential is substantial.
However, with the company’s share price having risen so spectacularly since the turn of the year, it now trades on a forward price-to-earnings (P/E) ratio of around 48, which indicates that further outperformance could be somewhat limited over the coming months.
Limited scope for growth
Also beating the FTSE 100 since the turn of the year has been Ocado (LSE: OCDO), with the online grocery company’s shares rising by 14% versus a 1% gain for the wider index. Its prospects for continued outperformance appear to be somewhat limited however, since Ocado’s valuation seems to fully factor-in its strong growth rate.
For example, Ocado trades on a price-to-earnings-growth (PEG) ratio of 2, which lacks appeal even though the company is expected to grow its bottom line by 29% this year and by a further 45% next year. And while the long-term potential for online grocery shopping is bright as more consumers are likely to engage in that space, the market seems to have already priced-in much of this potential.
As such, it may be better for investors seeking a food retailer to focus on the traditional players, many of whom are beginning to make successful comebacks due in part to an improving UK economy.
On the topic of the improving economy, electrical goods retailer AO World (LSE: AO) is set to benefit from a brighter macroeconomic outlook. Its bottom line is due to move from the red to the black within the next couple of years, with pre-tax profit of £8m forecast for the 2018 financial year. This could have a positive impact on investor sentiment in the stock and help to continue the share price rise of 5% since the turn of the year.
However, as is the case with Purplebricks and Ocado, AO World’s valuation seems to be rather overly generous. It trades on a forward P/E ratio of 106 and even though it has the potential to grow its top and bottom lines as well as expand into new territories, there should be stocks with superior risk/reward ratios on offer elsewhere.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.