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.
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.
Don’t regret ignoring this growth tip
In light of these factors, I am more than happy to sit on my hands rather than splash the cash on Topps Tiles or Purplebricks. But while there remains a lot of uncertainty facing these firms in the near term and beyond, the investment case for the stock detailed in this special Fool report is much more compelling, in my opinion.
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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.