Unfortunately, not all of these investments have turned out as intended. In 2016 shares in Woodford-backed Circassia lost two-thirds of their value in a single day after the company announced that it was abandoning its allergy portfolio following a failed second trial of its dust mite allergy treatment. And this year, Woodford has had to defend his ownership of Allied Minds, which has seen its share price fall 66% over the past 12 months. 

Mercia Technologies (LSE: MERC) is another of his struggling investments. Since listing at the end of 2014, the shares have lost nearly 40% as the company has been unable to convince investors that its portfolio is worth paying for. 

A risky business 

Like Allied Minds, Mercia incubates early-stage businesses. According to the firm’s half-year results published today, at the end of September, the fair value of its investment portfolio was £64.7m. This was up £12.7m thanks to £9.7m of new capital and £3m of “net upward value movements” (an increase in the value of its investments). Total net assets were £123.6m (up from £81m) with cash of approximately £55m. 

As well as investing its own funds, Mercia also invests on behalf of third parties. This extra capital allows the group to scale up its investments as well as generate fees on the additional capital. Funds under management in the period to September were £337m, up from £220m in the first half of September. 

To be able to retain third-party investors the company has to show that it can generate returns that can’t be found elsewhere. And it looks as if the business is proving its worth on this front. During the period to September, Mercia’s RisingStars Growth Fund I realised a £34.5m cash investment in Blue Prism Group plc, representing a 55 times return. 

Unique approach 

Mercia is unique in its approach to managing outside cash. By collecting fees on this money, the majority of the group’s operating costs are offset. In comparison, other similar companies only get paid when they realise value from an investment, which can take years. For the six months to September Mercia booked revenue of £4.8m (up 66% year-on-year) and a post-tax profit of £1.4m after accounting for operating costs. 

Overall, it is a cash-rich venture capital business that’s generating revenue and has a record of producing enormous returns for investors. So why am I avoiding it? 

Well, put simply I think Merica is too expensive. At the time of writing, the shares are trading at a discount to net asset value per share (41.1p at the end of September) of 12.4%, which is just not cheap enough. 

Valuing early-stage tech businesses is notoriously tricky and there’s no guarantee that these investments will ever generate income. With this being the case, I believe that a wide margin of safety (deep discount to NAV) is required before investing in a company like Mercia. A discount of 30% or more to NAV would be more appropriate and protect investors from any failures in Mercia’s investment portfolio.

The post Why I’d dump this struggling Neil Woodford stock appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share 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.

The company released its annual results today and I like the look of its business model, the progress it’s making and its current valuation.

Business model

There are two prongs to Mercia’s business model. It’s an asset manager, running third-party investment funds that nurture young businesses. It receives fees for these and other services by which it aims to cover a large chunk of the plc’s operating costs.

As the young businesses develop, it identifies ‘Emerging Stars’ among them and provides direct investment follow­-on capital from its own balance sheet. This is the portfolio of 24 investments I mentioned earlier. It ultimately aims to exit these investments with rich rewards from lucrative flotations or trade sales.

Progress

In today’s results, for its financial year ended 31 March, it reported that funds under management increased to £336m from £220m, with revenue rising to £6.7m from £1.8m. Meanwhile, its portfolio of 24 direct investments increased in value to £52m from £38.1m.

The year also saw Mercia demonstrate the viability and potential gains of the direct-investment element of its business model with the trade sale of Allinea Software to ARM, providing an 88.4% uplift on the group’s direct investment cost. The IPO of Concepta (a digital fertility/pregnancy testing business) was another notable event.

Valuation

When Mercia listed on AIM in December 2014, it raised a net £66m at 50p a share and had a market cap of £106m. Pro forma net assets were just over £75m (34.4p a share), so it was valued at 1.41 times book value.

It raised a further £40m (gross) at 46p a share in February this year and today reported net assets of £121.4m (40.4p a share) at its March year-end. At a current share price of 34p — up 4.6% on the day — the market cap is £102.2m, so it’s now valued at 0.84 times book value.

Despite its increased scale, emerging proof of its business model and management saying today “we can already see several material value inflexion points arising in the coming year,” Mercia is considerably cheaper than at the time it listed on the stock market. It’s also cheaper than a much-higher-profile stock offering exposure to early-stage businesses: Woodford Patient Capital Trust (LSE: WPCT).

Patience

At a share price of 97p and with net assets of 100.3p a share, Patient Capital trades at 0.97 times book value. It also happens that Patient Capital has given Mercia the Neil Woodford seal of approval. It owns a 25% stake in Mercia and both companies are chaired by Susan Searle.

With 76 holdings, Patient Capital can be seen as a lower-risk proposition than this article’s other subject, particularly as only about half its holdings are unquoted businesses, with the portfolio also containing some relatively large and familiar quoted names, such as Purplebricks and US-listed Prothena.

Nevertheless, I see Mercia’s 24 investments as reasonable diversification and the company’s third-party fund management arm as providing a useful degree of relative stability. Both businesses have potential to deliver excellent long-term returns for patient investors and I would rate them as ‘buys’ at their current discounts to book value.

The post Is this stock a better buy than Woodford Patient Capital Trust plc? appeared first on The Twelfth Magpie.

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G A Chester 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.

One such opportunity is power station owner Drax (LSE: DRX). 

Contrarian buy 

In a recent interview, Woodford admitted that his fund added to its existing position in Drax during February, after the company’s recent stock declines. 

Following a number of profit warnings, Drax has fallen out of favour with the wider market during the past two years. The company, which runs the UK’s largest wood pellet-fired power station, has been hit hard by the government’s flip-flopping on energy policy and the removal of green energy subsidies. As a result of these changes, Drax’s earnings per share have slumped by 90% from 52p per share in 2012 to 5p for 2016. 

As earnings have crashed, so has the company’s share price. Since the beginning of 2014, shares in Drax have declined by 60%. But it seems Woodford senses value here. Drax is currently trying to reduce its dependence on power generation and recently acquired a business energy supplier. Thanks to this acquisition, City analysts have pencilled-in earnings per share growth of 160% to 13p this year and a further 45% to 18.9p for 2018. These are impressive growth rates, but even if the firm hits these high targets, the shares will still look expensive. 

Earnings per share of 18.9p suggest a forward P/E multiple of 17.3 for 2018. Considering Drax’s past, it does not seem wise to pay such a high multiple for the shares. 

Blue-sky buy 

Alongside Drax, Woodford also revealed in the interview that he had been buying shares in Mercia Technologies (LSE: MERC) and Homeserve (LSE: HSV) over the past two months. 

Mercia is an investment company with the goal of generating capital growth for shareholders in the creation, funding, incubation and development of technology businesses. It is a venture capital business, working on behalf of investors in businesses it believes have the potential to change the markets they operate within. 

This operation, which is similar to many of Woodford’s other venture capital style-businesses, recently won two contracts to manage funds associated with the UK government’s Northern Powerhouse scheme. The contracts include a £57.5m equity fund and £51m debt fund under the control of the state-owned British Business Bank. 

These deals show that Mercia is clearly an important business with connections in all the right places. If you have a high risk-tolerance, this could be a share for you. 

Growth buy 

Meanwhile, year-to-date shares in Homeserve have lost nearly 10% of their value. However, even after these losses, the shares look expensive trading at a forward P/E of 21.5 for the year ending 31 March 2017. Next year City analysts have pencilled-in earnings per share growth of 18% to 30.5. If the company can keep this growth up, it could be a solid long-term growth buy. The shares support a dividend yield of 2.6% while you wait. 

The post Should you follow Neil Woodford into these 3 stocks? appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• 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?

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