The UK housing market is booming, but I’d avoid this growth stock

Paul Summers — Tue, 06 Jul 2021 11:43:47 +0000

A booming housing market has been good news for listed housebuilders, mortgage advisers and estate agents. And this is borne out by the latest full-year numbers from Purplebricks (LSE: PURP). But should investors like me be ready to take a stake in this growth stock? I’m not so sure…

Rocketing earnings

Now, don’t get me wrong. The figures from the online estate agent were pretty encouraging. Unsurprisingly, the number of instructions received by Purplebricks jumped higher, by 14%, to a little over 58,000 in the year to 30 April.

The average revenue per instruction received also increased by 7%. All told, this led the online estate agent to report a 13% rise in revenue to £90.9m. Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) also rocketed 314% to £12m.

On top of these numbers, Purplebricks said it would be launching a new pricing model this month, following a successful trial in the North West. Customers will be given the option of having their upfront fee reimbursed if they don’t sell their home.

However, since it’s too early to say how well this will be received, Purplebricks said it expected FY22 EBITDA would be flat year-on-year. This would be in accordance with what the market’s expecting.

Unfortunately, the market doesn’t seem all that impressed with today’s news. Purplebricks’s shares were modestly lower in early trading.

Why might this be?

There could be a few reasons. For one, some investors may still be finding it hard to forgive the company for over-reaching itself in the early days by trying to capture overseas markets.

Yes, the share price is up almost 70% in the last 12 months as Covid-19 has been (almost) defeated. However, many small-cap growth stocks have experienced similar gains. Moreover, Purplebricks’ valuation is still 83% lower than where it was nearly four years ago. As a one-time holder, I’m just glad I departed with a profit back then.

It’s also hard to say where the Purplebricks share price goes from here. Sure, there are things to be positive about. The UK housing market is hot and the new strategy could work. On top of this, Purplebricks’ finances also look pretty sound.

Following the sale of its Canadian business, it had £74m in cash at the end of the period. Like other firms, PURP has also repaid the furlough support it received (£1m) over the pandemic.

Against this, investors need to bear in mind the stamp duty holiday has now finished. Whether this leads to a fall in sales and a subsequent reversal in the housing market remains to be seen.

Regardless, CEO Vic Darvey’s goal of gaining market share and growing annual revenue by more than 20% in the medium-term won’t be easy. The environment in which Purplebricks operates remains highly competitive. Yes, effective marketing will help, but that comes at a cost.

Speaking of which, there’s also the opportunity cost for investors like me to consider. Why bet on a company that’s still to generate meaningful profits in an incredibly buoyant market when I can probably generate more-than-adequate returns for much less risk elsewhere?

Better options

Despite once being optimistic about its ability to truly disrupt a stale industry, I’m far warier of Purplebricks than I used to be. In my view, there are far more promising growth stocks to invest in.

The post The UK housing market is booming, but I’d avoid this growth stock appeared first on The Twelfth Magpie.

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Paul Summers 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.

Could Lifetime ISAs seriously damage your wealth?

Kevin Godbold — Thu, 17 Nov 2016 12:51:44 +0000

In April 2017, the government plans to make new Lifetime Individual Savings Accounts (LISAs) available to anyone between the ages of 18 and 40.

25% extra free

If you open one of these accounts, the great kicker is that any savings you put in before your 50th birthday will be topped up with a further 25% bonus from the government. Wow. I wish they’d been around when I was young enough to qualify.

There will be no maximum monthly contribution and you can plan to save as little or as much as you want each month, up to £4,000 a year. However, with that 25% bonus, it makes sense to save as much as you can so that your invested money works hard for you.

If you understand the laws of compounding — where you can earn interest on the interest as well as on the initial capital invested — you’re well on the way to building your fortune, if you remain a saver and investor. If you’re a borrower, on the other hand, compounding works against you, pulling you away from building your first fortune.

Here are the strings

As we might expect, the proposed Lifetime ISA comes with a few strings. In order to collect the bonus the government gives you your LISA savings must be spent on particular things, otherwise the government will snatch the bonus away AND potentially some of your own savings.

You can spend the money you’ve saved and the bonus if you use it for a deposit on your first home if it’s worth no more than £450,000. You can also use the money you’ve saved and the bonus for retirement and draw it all out tax-free after your 60th birthday.

If you withdraw the money from the LISA before you’re 60 and don’t spend it on a house deposit, you will lose the government bonus and any interest earned on the bonus money. On top of that, the government will impose a 5% charge on the rest of your funds, which is how you could end up damaging your wealth with a Lifetime ISA.

Wealth warning

The Financial Conduct Authority (FCA) seems to be concerned that investors may not understand the difference between a pension and a LISA, which is a fair point. If you’re tempted to put money in a LISA before putting it in your employer’s pension fund, for example, you could miss out on extra contributions that your employer normally makes to your pension.

The FCA wants a wealth warning attached to LISAs to make sure investors understand how they work. For example, to make the further points that savers need to switch to something else after the age of 50; that if you’re not buying a home, access to saved money is unavailable until the age of 60 if you want to keep the bonus; and that higher rate taxpayers may be better off with a pension because of tax relief.

Overall, I think it’s worth spending time getting to grips with LISAs and planning the opportunity into your overall investment strategy for home ownership and retirement.

After all, it’s not every day you get an instant 25% return from which further compounding can help grow your savings.

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