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Why I’d sell Purplebricks Group plc to buy this growth stock

Purplebricks (LSE: PURP) has been very popular with investors of late. In fact, thanks to the company’s excellent advertising (I see the ‘commisery’ campaign as particularly compelling), almost everybody has heard of it.

But though that’s highly desirable from a marketing perspective, it can be anathema to those trying to find a bargain share. And I feel sure that this very high public profile has drawn far more investors in to buying the shares than we’d otherwise see, and that has pushed prices up to levels that I find scary.

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Do you remember online fashion retailer ASOS? Its shares peaked quickly too, but they crashed and they’re still lower today than back in February 2014.

Where’s the profit?

There are no Purplebricks profits expected before 2019, and even then the City is only predicting a modest pre-tax profit of £6.6m — with the shares at 371p today, we’re looking at a forward P/E of 206, two years out. And that’s after the price has fallen back a bit — at August’s peak of 525p, that P/E stood at nearly 300.

Now, I know a huge P/E in the first profitable year can be misleading, but I turn to my second biggest concern — how much of a barrier to entry for an online company is there? With relatively little in the way of material infrastructure needed to set up a similar operation, I don’t actually see a lot — there are no expensive warehouses or distribution chains like ASOS needs (and even there, Boohoo.Com is hot on its heels).

Two more years before any profit, and a whole real estate sector that’s surely looking at the model and planning some moves.

Good company, first-mover, great marketing, too expensive.

Pharma upstart

Allergy Therapeutics (LSE: AGY) is a pharmaceutical group specialising in allergy vaccines, and it released full-year results Thursday. 

Earnings have been a bit erratic of late, to say the least. But there are some core trends that really make me think I’m looking at a company with a focus on the long term and not on grabbing short-term attention — in particular, the firm has achieved a “10% compound annual growth in net sales over 18 years.

The year to June 2017 resulted in a 32% rise in revenue (15% at constant currency) leading to a 72% hike in operating profit, and a 13% gain in European market share.

Chief executive Manuel Llobet spoke of “continuing growth and progress on our pipeline“, saying he expects “further good progress in the coming year.

There’s some investor sentiment getting behind Allergy Therapeutics too, with the share price having gained 64% in the past 12 months to today’s 32.75p. Invesco Perpetual, formerly managed by Neil Woodford, owns almost 6% of the stock, and I see that as an important vote of confidence.

The risk?

A possible downside to an investment here is that it would not expose us to the same diversification that is offered by many of the company’s fellows in the pharmaceuticals sector. And with the chance that big investments in narrowly-focused research areas can come to nought being sizeable, I don’t want to underestimate that risk.

But being focused on the specific field of allergy research (which is addressing an increasing problem in the 21st century), the potential rewards could be high.

On balance, I see Allergy Therapeutics as a risk worth taking.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended 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.