Are online stars Rightmove plc and Purplebricks plc now a safer bet than the housebuilders?
Housebuilders such as Persimmon and Taylor Wimpey were among the worst hit shares following Britain's vote to leave the EU. While some investors may already regard this as a buying opportunity, there's the very real possibility that prices will continue to fall in the short-to-medium term, especially given yesterday's news that UK construction saw its weakest performance for seven years in June.
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Personally, I'm more interested in how the new wave of pessimism concerning the UK housing market may impact on related but far more expensive shares, such online property search giant Rightmove(LSE: RMV) and new-estate-agent-on-the-block Purplebricks(LSE: PURP).
Move on in
On 23 June, shares in Rightmove were trading at 4,225p. Today, they change hands for just 3,500p. While this fall won't have been welcomed by existing investors, long-term holders have seen it all before.
In 10 years, Rightmove's shares have increased by over 1,000%, demonstrating the incredible gains that investors can reap if they select the right companies to buy and hold for years rather than months. Don't forget that this period included the financial meltdown in 2008 in which shares of UK housebuilders tanked. After following the market down for a year, Rightmove's shares recovered and pursued a relentless rise upwards while the aforementioned companies were still finding their feet. Perhaps history could repeat itself.
According to Stockopedia, the shares currently trade on a rolling price-to-earnings (P/E) ratio of 26. This is understandable when the £3.5bn cap's history of annual double-digit earnings growth, sky-high operating margins, net cash position and 80% market share is considered. The well-covered dividend, while small at just over 1%, has also grown at a furious rate over the last few years.
Most investors would still regard this as a very expensive share to buy, even after the recent price fall. However, if the company continues to be pulled down by the negative sentiment now engulfing the UK's housebuilders, I can see the investment case becoming very attractive indeed.
Build a position
Following a temporary dip, the share price of online estate agent Purplebricks has now almost recovered back to pre-referendum levels. Contrast that with the shares of traditional agent, Foxtons that have plummeted from a pre-Brexit 167p to 104p after declaring that its full year profits would be "significantly lower" than last year.
The resilience of the Purplebricks share price may be largely due to the high hopes investors have for the company and its disruptive business model. With a head start on the competition and plans to expand into Australia, this is certainly a company with a lot of potential. Although released before last month's crucial vote, its first set of annual results were also excellent, with group revenues jumping by 448% and gross profits up by 427%. The fact that Purplebricks managed to generate 800,000 more visits to its site compared to the previous year is further evidence of how fast the industry is evolving.
Despite recent market volatility, shares in Purplebricks continue to be anything but a bargain. There's also the fact that, by their very nature, growth companies can be weighed down by unrealistic expectations. Given that it only takes one disappointing update for a share price to collapse, it's vital that prospective investors first consider their attitude to risk, financial goals, investing horizon and required rate of return before adding Purplebricks to their portfolios.
Be patient. Be profitable.
One of the most important qualities to develop as an investor is the ability to be patient. While things may look somewhat bleak for the property market at the moment, some might argue the long-term picture hasn't changed. Britain is still in desperate need of more housing and housebuilders are, generally-speaking, better managed than they were during the last property crash. Moreover, the period of record-breaking low interest rates looks set to continue post-Brexit.
That said, if buying a housebuilder doesn't appeal, companies such as Rightmove and Purplebricks may be interesting alternatives. This is particularly the case if you have many years of investing ahead and can afford to buy shares in businesses that have significant growth potential but may experience a few wobbles along the way.
If neither of these firms grab your attention, however, you may be interested in another growth opportunitythat has caught the eye of the experts at the Motley Fool. It's detailed in a special reportthat's FREE and without obligation.
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Paul Summers owns shares in Purplebricks. The Motley Fool UK has recommended Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
