Launched in April 2015, Patient Capital is a growth-focused investment trust that invests largely in early-stage and early-growth businesses. It has steadily ramped up its exposure to unquoted companies.

Today, its make-up is not dissimilar to that of IP Group, which is an incubator of potentially “world-changing” life sciences and technology businesses. Indeed, as well as owning shares in IP, Woodford is a fellow cornerstone investor in quite a number of its investee companies.

Discount prices

Tangible net asset value (TNAV) is the appropriate measure to look at for investment trusts and investment companies like Patient Capital and IP. Currently, the shares of both are trading at a discount to their last reported TNAVs, and so appear to offer good value.

As I’m writing, Patient Capital’s share price is 84.6p — a 12.2% discount to its TNAV per share of 96.35p. IP’s share price is 103.6p — a 15.5% discount to its 122.6p a share TNAV. However, I’m not convinced these discounts are wide enough to offer investors a sufficient margin of safety. Here’s why.

High paper values

Around this time last year, I drew readers’ attention to a controversial report on IP by US short-seller J Capital Research (JCap). The report suggested that a relatively small number of cornerstone investors, who set the valuations of IP’s unquoted companies, had “a collusive interest creating high paper values.” JCap put a value on IP that was a 40% discount to the group’s accounting TNAV.

By way of testing this in a small way, I’ve searched out IP investee companies that have floated on the stock market to see what happened to their valuations when they were subjected to scrutiny and assessment by a much wider pool of investors.

I found five unquoted companies in which IP is a cornerstone investor that came to market via an initial public offering (IPO) in the last five years. The table below summarises my findings.

The average current value (market cap) of the companies is 45% below their average value at IPO. On a per share basis, the picture is even worse, with an average decline in value of 81%, due to dilution via further fundraisings.

I think this provides some support for JCap’s view that IP’s unquoted investee companies go in its books at over-rosy valuations. Of course, with Woodford being another cornerstone investor in this area of the market — not infrequently alongside IP — much the same criticism can be levelled at Patient Capital.

On balance, I’m inclined to avoid these two stocks at their current prices. I’d want much bigger discounts to TNAV than Patient Capital’s 12.2% and IP’s 15.5% to feel I was getting value for money and a margin of safety.

The post Thinking of investing in these Neil Woodford FTSE 250 stocks? Read this first appeared first on The Twelfth Magpie.

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G A Chester 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.

There’s no denying that the stock has rewarded early investors very well. The price has more than trebled over five years, but since a peak in July last year it’s lost more than 35%.

I’m really not a follower of share price charts — but I do get a little twitchy when I see a certain growth share pattern emerging:

Everyone piles in, keen not to miss the next big thing. The share price soars, then reaches a peak and starts to fall back a bit. Next we have a second wave of buyers who push it back up, only to see a subsequent decline that typically continues for some time.

Risky stage?

Purplebricks is at the point when that second peak has faded, and the price is now lower than the intermediate dip. Anything could happen tomorrow, of course, but I’ve seen this same thing followed by steady decline so many times that it’s enough to keep me away.

Monday’s news of a “strategic investment from Axel Springer of approximately £125 million including a £100 million subscription for new shares” offered a boost to confidence, with the cash to be used partly for the firm’s rollout in the US. But the market didn’t really respond, and I can’t help wondering if we could be seeing an overstretched expansion plan a little too early.

I’ve previously offered other reasons for my bearishness on Purplebricks, and it remains a sell for me.

Blue sky

The other Neil Woodford stock I wouldn’t touch right now is IP Group (LSE: IPO), which released full-year 2017 results on Thursday.

The company, which invests in a portfolio of early stage businesses built on research from its partner universities, reported net portfolio gains of £94.2m, up from £6.5m in 2016. Reported net assets rose from £768.7m to £1,508.5m, which also seems impressive, and the firm even recorded a profit for the year of £53.4m (from a 2016 loss of £14.8m).

So what don’t I like about it? For one thing, I’m greatly disturbed by a very critical analysis of the company unearthed by my colleague G A Chester. If the opinion offered by J Capital Research is correct, that IP Group shares are worth no more than 75p, then buying at 116p (at the time of writing) could be a big mistake. 

Buy what you know

Two other things keep me away too. Firstly, the diversity and the innovative nature of the firm’s investments mean I really don’t understand enough to evaluate them properly — or properly understand IP Group’s accounts. In fact, very few investors will be able to, and that means I’d largely be investing blind — and that’s something I just don’t do.

The other thing is that I just don’t go for unquantifiable ‘jam tomorrow’ blue sky investments these days. I did occasionally in the past, but my reliance is increasingly on investments where I can see solid earnings and healthy dividends today, and future profits where reasonable estimation is possible.

The post Purplebricks Group plc isn’t the only Neil Woodford stock I’d sell today appeared first on The Twelfth Magpie.

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Alan Oscroft 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.

Of course, it just goes to show that even a veteran investor with an enviable long-term record of outperforming the market can go through difficult spells and make some poor stock choices. Today, I’m looking at one Woodford stock I’d buy, and one I’d sell.

Growing business momentum

Specialist healthcare firm BTG (LSE: BTG), which is a member of the mid-cap FTSE 250 index, ranked at number 18 in Woodford’s flagship Equity Income fund at the last reckoning, with a weighting of 1.8%. It was one of his better performers in 2017, rising almost 30% over the course of the year.

Woodford has been an investor in the company for many years and seen it progress via a number of key products across its interventional medicines pipeline. A fund update for April last year noted: “As so often happens with early-stage companies, the development process has taken longer than initially expected, as has the process of market penetration once products have made it to market.” However, BTG provided mounting evidence of growing business momentum through 2017, and the share price responded accordingly.

City analysts are forecasting the company will deliver a 27% rise in earnings to 29.3p a share for its financial year ending 31 March. At a share price of 745p, this gives a price-to-earnings (P/E) ratio of 25.4. While this is a relatively high multiple, factoring in the earnings growth produces a price-to-earnings growth (PEG) ratio of 0.9. This is on the good value side of the PEG fair value marker of one and suggests the stock could be a great buy for the growth on offer. I rate it as such and think it could put in another good performance through 2018.

An accounting game more than a company?

I’m a lot less keen on another of Woodford’s FTSE 250 stocks, namely IP Group (LSE: IPO). IP provides capital and other assistance to a large portfolio of early stage businesses, which are mainly founded on research coming out of its partner universities. It’s the 10th largest holding in Woodford’s Equity Income fund, with a weighting of 2.4%.

Last month, IP came under attack in an extensive report by US short-seller J Capital Research (JCap). The report, which you can access at JCap’s website, is not without errors and some contentious interpretations, but I believe the broad thesis has substance.

JCap points out that since 2008, IP has invested a total of £346.3m in its portfolio companies but only realised £40.9m from disposals, with other gains being paper-only. It suggests: “IP Group is an accounting game more than a company and has an atrocious track record of delivering bankable returns.”

JCap put a valuation of around 75p on the shares. They’re trading at 134p as I’m writing, and I view the bear case as sufficiently compelling to rate the stock a ‘sell’.

The post One Neil Woodford growth stock I’d buy, and one I’d sell appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended BTG. 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.

However, as an investment, it still seems to be rather overvalued. For example, while earnings for the current year are forecast to rise from 2p per share last year to 8.4p per share this year, it still leaves IP Group trading on a price to earnings (P/E) ratio of 25.5. That’s expensive and, with IP Group’s share price having risen by just 4% since the turn of the year, it seems likely that a degree of pressure may be exerted upon it in the short run as a result of its rather rich valuation.

Therefore, 3i (LSE: III), which invests in a range of private equity and infrastructure opportunities, appears to be a better buy. Certainly, its shares have soared by 20% since the turn of the year, but they still trade on a P/E ratio of just 9.1. And, with 3i paying out just 24% of profit as a dividend, there is tremendous scope for it to increase shareholder payouts at a brisk pace moving forward so as to improve 3i’s current yield of 2.6%.

Also having considerable future potential is document storage company Restore (LSE: RST). It today announced the acquisition of The Data Imaging and Archiving Company for £1.45m, which is slightly higher than the company’s annual turnover of £1.3m. And, while the acquisition only made a small profit last year, Restore is expected to grow its earnings by 24% in the current year, and by a further 14% next year. This means that Restore’s bottom line could be as much as 41% higher in 2016 than it was in 2014 and, with it trading on a price to earnings growth (PEG) ratio of just 1, it appears to offer considerable scope for capital gains over the medium to long term.

Meanwhile, online video search company Blinkx (LSE: BLNX) continues to offer excellent value for money, but a highly uncertain future. For example, it trades at well below net asset value, has a very strong balance sheet and impressive cash flow, but remains in a transitional period where it is expected to maintain a red bottom line in the current year and next year. And, while its strategy of focusing on mobile customers and rebranding its offering, as well as making multiple acquisitions, could pay off, the likes of Restore and 3i appear to offer greater potential rewards and much lower risk for long term investors.

The post Is IP Group Plc A Better Buy Than Blinkx Plc, 3i Group plc And Restore PLC? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of 3i Group and Restore plc. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

What are the similarities and differences between the options? And which is likely to give you most bang for your buck?

Woodford’s target weighting for his Patient Capital portfolio is: 25% mid/large quoted companies; 25% early-growth companies (typically quoted but may be unquoted); and 50% early-stage companies (quoted and unquoted). Woodford is very much seeking to exploit the same cutting-edge-technologies space that Allied Minds, IP Group and Imperial Innovations invest in, except that he includes mid/large cap exposure.

Woodford anticipates initially holding 50-100 companies; potentially more as the portfolio matures. Imperial, IP and Allied have stakes in 98, 90 and 20 companies, respectively (a combined 208).

Geographically, Woodford is targeting at least 70% invested in companies traded on the London Stock Exchange or incorporated in the UK. An equally-weighted Imperial, IP and Allied portfolio (let’s call it IIPA, for convenience) would have about 67% invested in UK companies, via Imperial and IP, and 33% in the US, via Allied.

So, there are a number of broad similarities between Patient Capital and IIPA, with IIPA’s lack of any large-cap exposure perhaps being the most marked difference. The table below shows the blended IIPA’s top 10 holdings

The IIPA top holdings look a little scary against some of the familiar blue-chip names, such as AstraZeneca, that are likely to feature in Patient Capital’s top 10.

But how has the unconventional IIPA portfolio performed? The table below shows some compound annual growth rate (CAGR) numbers for IP and Imperial. (Allied joined the stock market less than a year ago, so isn’t included.)

Now, what can we expect from Patient Capital. The trust’s investment objective is as follows:

“The Company will aim to deliver a return in excess of 10% per annum over the longer term. (Note: this is a target only and not a profit forecast and there can be no assurance that it will be met.)”

Woodford appears confident of success, though, because Patient Capital is charging no annual management fee. His remuneration will come in the form of performance fees, dependent on him beating the 10% per annum hurdle.

It seems Woodford believes he can do at least as well as that long-term 12% CAGR delivered by IP in the table above — and, what’s more, achieve it with 25% of his portfolio invested in less risky FTSE 100/FTSE 250 companies.

While Woodford is renowned for his blue-chip nous, investing in early-stage/early-growth companies isn’t unfamiliar to him. In fact, he actually holds Allied (4.1%), Imperial (1.3%) and IP (0.8%) in his mainstream Woodford Equity Income Fund.

Significantly, though, he has also put additional cash into a select few of the IIPA investee companies — presumably in the belief that his subset will out-perform the whole; otherwise, why bother? And the same goes for a number of other early-stage/early-growth companies he’s invested in that aren’t in the Allied, Imperial and IP portfolios.

Woodford will have some hard data on his stock-picking performance in this area of the market from past experience, and projections on what he might reasonably hope to achieve when combining this with a 25% weighting of his high-conviction large-cap picks.

As such, on balance, I tend to think that Woodford’s Patient Capital could offer a better risk-reward profile than the alternative IIPA portfolio. Patient Capital’s shares closed at 102p on the first day of dealing (21 April). I’ll note the IIPA prices at the same date — Allied (687.5p), IP (219.1p) and Imperial (490p) — and perhaps revisit the subject in the future.

The post Should You Buy Woodford Patient Capital Trust PLC Or Back Allied Minds PLC, IP Group Plc And Imperial Innovations Group plc? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.