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Should you buy Neil Woodford’s top two stocks?

While Neil Woodford is experiencing a lengthy period of underperformance, he is still one of the most popular portfolio managers in the UK. As a result, many investors monitor his funds closely and pay close attention to both his holdings and his trades.

Today, I’m looking at the top two holdings in Woodford’s Equity Income fund. Are these stocks worth buying for your own portfolio?

Imperial Brands

The largest holding in Woodford’s flagship £6bn fund is tobacco manufacturer Imperial Brands (LSE: IMB). At 30 June, the stock had an 8.9% weighting in the fund according to the Woodford Investment Management website, which is certainly a large position. Clearly, the portfolio manager sees considerable value in Imperial. Is it a good stock to buy then?

Personally, I share his view that it offers value right now. With the stock down around 27% from the level it was trading at two years ago, I think he has been smart to load up on the shares.

It’s no secret there are concerns that the tobacco industry is in decline. However, as my colleague Rupert Hargreaves pointed out, this is nothing new. Tobacco sales have been declining for decades now, yet tobacco manufacturers have always found ways to remain profitable. And tobacco investors have been rewarded handsomely. Zooming in on Imperial Brands in particular, the company has lifted its dividend by 10% per year for nine consecutive years now, which is an incredible achievement, and it plans to keep increasing its payout by 10% per year in the medium term.

Of course, with governments around the world continually trying to regulate the tobacco industry, there are risks to the investment case here. However, with the shares currently trading on a forward-looking P/E of just 11.3 (vs the FTSE 100 median of 13.9) and offering a huge dividend yield of 6.3%, Imperial’s risk/reward profile looks attractive, to my mind.

Burford Capital

While Imperial Brands is a well-known FTSE 100 stock, Woodford’s second-largest holding, Burford Capital (LSE: BUR), is more under the radar. Listed on the AIM market, it provides capital to the global legal industry and is a leader in litigation finance. At 30 June, the stock had a 5.2% weighting in Woodford’s Equity Income fund, according to his website.

Burford Capital is a very different type of stock to Imperial Brands. Whereas Imperial would be classified as a ‘value’ stock given its low P/E and high yield, Burford is definitely more of a ‘growth’ stock. With a forward P/E of a 21.8 and a prospective yield of just 0.5%, its valuation is higher and its yield is lower. However, don’t let these metrics put you off – I believe it could still potentially generate attractive shareholder returns over time.

Burford is certainly growing quickly. For example, over the last three years, revenue has climbed from $82m to $343m, representing a compound annual growth rate (CAGR) of a high 61%. Profits have soared too, with earnings per share last year rising 126% to 127 cents. Woodford Investment Management has stated that it remains confident that Burford can “continue to deliver strong and sustainable growth in the years ahead.”

Overall, as a growth stock, I see long-term potential in this one. However, investors should be aware that after such a strong rise in the share price, the stock could be prone to a near-term correction.

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Edward Sheldon owns shares in Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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.