Two Neil Woodford stocks I wouldn’t touch with a bargepole

Royston Wild looks at two Neil Woodford shares that carry too much risk today.

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In recent articles I have looked at several Neil Woodford income stocks that I would be happy to buy, some of which are expected to deliver exceptional earnings growth and others tipped to keep shelling out monster dividends.

However, these pieces also look at a number of Woodford favourites that stand on shaky foundations, and which I would therefore sell without delay. Here are two.

Made of straw?

Predictions that Purplebricks’ (LSE: PURP) low-cost model would revolutionise the estate agency industry and pave the way for brilliant earnings growth saw the share price go gangbusters during the first half of 2017.

This rapid ascent, underpinned by expectations that expansion into the US and Australia would replicate its success in Britain, caused investors to eventually take a back seat as its valuations ballooned. It’s a company with plenty of promise but little else, as many have been quick to point out.

Even as share pickers have been quick to cash in on this strength and book profits, Purplebricks still trades on eye-popping earnings multiples. Its bottom line is expected to remain underwater with losses of 5.9p per share in the year to April, according to City analysts, but then to pop up with earnings of 1.7p in fiscal 2019.

This leaves the business dealing on a gargantuan forward P/E ratio of 249.2 times.

Latest trading details from Purplebricks were certainly impressive, with the 6,160 instructions it received in January up by around two-thirds from the same 2016 month, and its online market share improving to 77%. However, recent housing market data revealing a steady downturn in homebuyer appetite could see the amount of business it can drum up begin to fall in the months ahead, and this could prove catastrophic for the company’s share price, given its premium rating.

A recent note by Jefferies questioning completion rates showed just how quickly investors are keen to dump the stock when news flow starts to alarm. I would prefer to sit on the sidelines than take the plunge right now.

DIY SOS

Even if trading performance has been a little better in recent months, I find returning investor appetite for Topps Tiles (LSE: TPT) something of a mystery as difficult conditions look set to persist.

Investors started barging back into the FTSE 250 retailer long before its bubbly trading statement in January, a release in which it advised that like-for-like sales had risen 3.4% during the first quarter, speeding up from the 0.3% rise chalked up in the same 2016 period.

Topps Tiles’ strategy of “out-specialising the specialists” by investing in its product ranges and customer service proposition has proved effective in jump-starting sales more recently and kept it outperforming the broader market. But the business still has plenty of trouble to face as weaker consumer spending power puts demand in the DIY segment under increasing pressure, something that B&Q owner Kingfisher will attest to.

City analysts are expecting earnings to slip 8% at Topps Tiles in the year to September, although a 3% rebound is forecast for fiscal 2019. I think hopes of a near-term recovery are built on shaky foundations however, and therefore not even an ultra-low forward P/E ratio of 12.4 times is enough to tempt me in.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no 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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »