One of the cornerstones of a sound investment strategy is to identify shares that have been mis-priced by the market.
Could it be argued that Kier Group (LSE: KIE) and Purplebricks Group (LSE: PURP) are a couple of such shares being unfairly treated by the trading community? These particular property stocks have lost 90% and 67% of their value respectively over the past year, a descent that leaves Kier for one dealing on a prospective earnings ratios of 1.5 times.
The question is, then, do these low ratings represent a great buying opportunity for against-the-grain investors? And if so, which is the better selection?
On the brink?
A share that carries a valuation as low as Kier’s is practically loaded with flashing red lights. Companies trading on these kinds of multiples are prime targets for hopeful punts, but what’s the sense of making such an investment when there’s a strong chance of it going bust?
And there’s certainly a strong chance of this particular small-cap dropping off the edge of the planet in the not-too-distant future.
Let’s face facts: Kier is absolutely swimming in debt. Take no notice of what the business’s balance sheet says as it looks as if it has more than a billion pounds worth of financial obligations for which it is struggling to pay.
Another rights issue could be just around the corner, but given the company’s trouble to attract fresh investment last time around — just 38% of shares were taken up during the autumn fundraising — and Kier’s worsening trading performances since then, I’d be amazed to see investors riding en masse to the rescue if called upon again.
A better buy?
The fact that Kier Group is trying desperately to avoid going bust leaves Purplebricks, at least in the context of this article, as the victor by default.
But the online property marketing play has considerable troubles of its own as the cost of its ambitious international expansion programme weighs. We only need to look at Wednesday’s disastrous trading update in which it advised that operating losses ballooned to £52.3m in the 12 months to April 2019 from £27.8m a year earlier.
Once seen as the road to explosive long-term profits growth, Purplebricks’ aggressive move into other global territories has proved a disaster, heaping enormous stress on the balance sheet — cash on the books more than halved last year to sit at £62.8m as of April — and forcing it to eat a large slice of humble pie in the process.
The company announced plans to pull out of Australia in the spring and this week declared its intention to slink out of the US too, following on from those latest results. Its travails on foreign shores are only one part of Purplebricks’ problems, though, as with the Brexit issue remaining far from resolved, the cyclical slowdown in the UK homes market threatens to drag on.
So whilst on safer ground right now, I consider this property play — like Kier Group — as one to avoid like the plague right now. You’d be much better off deploying your hard-earned investment cash elsewhere.