Things just keep getting worse for Neil Woodford. Not only is the performance of his flagship Equity Income fund in the bottom 2% of all funds in the Investment Association’s ‘UK Equities’ classification over the last year (a one-year return of -12%), but this week, another one of his holdings, ‘hybrid’ real estate agent Purplebricks (LSE: PURP) has seen its share price fall over 20%.
Given that Woodford is one of the largest shareholders in the company this is bad news for the portfolio manager. So, what’s gone wrong at Purplebricks?
Taking a closer look, it’s clear that one of the problems with the company is that it has tried to grow too quickly. In recent years, it has spent millions of pounds attempting to expand into the US, Australia, and Canada and this has backfired spectacularly.
For example, in the US, Purplebricks was spending $15,000 in marketing per customer according to some analysts, yet listing fees were just $3,600. It doesn’t take Einstein to work out that those figures are alarming. Meanwhile, in Australia, the group tried to use the same business model that it has used here in the UK. Yet the two property markets are very different. While most houses are sold by private sale in the UK, in Australia the majority of houses are sold by auction, so Purplebricks’ model didn’t work.
Realising that its expansion strategy wasn’t working, Purplebricks has now said that it will be pulling out of the Australian market as well as launching a strategic review of its US operations. Additionally, founder and CEO Michael Bruce has stepped down with immediate effect. All in all, Purplebricks appears to be in a state of disarray and that’s reflected in the share price.
However, the substantial fall in the share price doesn’t surprise me. While I’ve said in the past that I thought Purplebricks’ disruptive business model looked interesting, I also said that the stock was a risky play, as not only is the group unprofitable, but the stock has also had a sky-high valuation in the past. For example, when I last covered it in late 2017, its market cap was close to £1bn! For this reason, I said I’d be steering clear.
As I often stress, when it comes to growth stocks, I think it’s much safer to focus on companies that are already profitable. I’ve found that by focusing on growth companies with track records of profitability, you’re less likely to experience big losses.
Avoiding Woodford’s fund
Going back to Neil Woodford, Purplebricks is a great example of why I am avoiding his fund at the moment. Examining the list of holdings in Woodford’s Equity Income, the fund just looks too risky to me, as there are many companies within the portfolio that are not yet profitable. Ultimately, that’s not what I’m looking for in an equity income fund. In that type of fund, I want to see blue-chip stocks that pay reliable dividends.
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Edward Sheldon has no position in any 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.