The Motley Fool

Are Purplebricks Group plc, Rightmove plc and Zoopla Property Group plc in danger of 50% corrections?

The outlook for the UK property market is highly uncertain. That’s due to several factors that could cause the value of house prices in the UK to endure a painful period. Chief among them is the potential for a Brexit on 23 June. Although ‘remain’ is in the lead according to most recent polls, the reality is that polls can be wrong, just as they were at the General Election last year. And with a number of undecided voters, the potential for a Brexit is real.

In addition, there will be a new London Mayor this week and this will inevitably lead to a refreshed housing strategy. And with the threat of an interest rate rise on the horizon, UK property investors may choose to delay purchases in order to see how the impacts of these three events ride out over the medium-to-long term.

Under pressure

Falling transaction volumes would be bad news for estate agencies such as Purplebricks (LSE: PURP), Rightmove (LSE: RMV) and Zoopla (LSE: ZPLA). Their sales and profitability could realistically come under a degree of pressure over the coming months and their forecasts could be downgraded.

In the case of Zoopla, it seems to have a considerable margin of safety built into its share price. Therefore, its downside may be somewhat less than is the case for Purplebricks and Rightmove. For example, Zoopla is expected to grow its bottom line by 30% in the current financial year and by a further 21% next year. And with its shares trading on a price-to-earnings (P/E) ratio of 27, its price-to-earnings-growth (PEG) ratio of around 1 indicates good value for money.

With regards to Rightmove, the margin of safety on offer is somewhat narrower than that of Zoopla. That’s partly because Rightmove’s bottom line is expected to rise by 9% in the current year and by a further 14% next year. However, the main reason for a narrower margin of safety is Rightmove’s current P/E ratio, which stands at 29.3. When combined with its growth rate, this equates to a PEG ratio of 2.4. This indicates that Rightmove’s shares may be fully valued and worth avoiding.

In terms of Purplebricks’ margin of safety, it appears to be extremely narrow. In fact, the company is currently lossmaking and while it’s forecast to move into profitability next year, this seems to have been fully priced-in by the market. Evidence of this can be seen in Purplebricks’ rating, with it having a forward P/E ratio of over 52. This indicates that while it does have long-term potential, Purplebricks may offer a less appealing risk/reward ratio than its sector peers.

Clearly, if Britain leaves the EU, if interest rates rise and if London’s strategy on housing changes, all three companies mentioned here could fall by 50% or more. However, the reality is that this scenario is relatively unlikely, although for long-term investors only Zoopla seems to offer an appealing risk/reward ratio out of the three stocks.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.