Purplebricks isn’t the only heavy faller I’ll be avoiding like the plague in 2019

Red siren flashing
Red siren flashing

At a time when all share prices appear to be heading southwards, it’s an unenviable achievement that online estate agent Purplebricks (LSE: PURP) still manages to stick out like a sore thumb.

Priced at 489p at the end of January, the very same stock now changes hands for over 70% less. Does this make it a bargain? Not yet, in my view.

Vulnerable to Brexit

At first sight, the company’s strategy of doing everything possible to win market share appears to be working. As my Foolish colleague Kevin Godbold reported last week, revenue rocketed 75% to £70.1m over the first half of the financial year. Trouble is, operating losses rose by a higher percentage — 122% to be exact — to £25.6m.

I sold my shares some time ago after becoming increasingly concerned by the pace at which the Solihull-based business was expanding overseas. While I understood management’s desire to capitalise on its first-mover advantage, I felt that the company needed to prove its business model closer to home first. I also became sceptical over its ability to withstand competition given that its pioneering low-fee approach is easily copied and could become the norm across the industry in time.

Should Purplebricks reach a point where it is reporting consistent profits, I may become interested again. Having now trimmed the upper end of its revenue forecast for the current financial year to £165m-£175m from £165m-£185m on concerns over the impact of Brexit, however, I suspect this isn’t likely to happen for quite a while yet.

With a recent report from Rightmove stating that the average price of a home fell £10,000 over the last couple of months (the biggest such fall since 2012) I think there’s every chance that the shares could sink even further as market activity slows.

Wrong strategy

Frankie and Benny’s owner Restaurant Group(LSE: RTN) is another stock I’ll be distancing myself from next year.

Like Purplebricks, the company’s share price has suffered over 2019 with a 33% reduction in value since the start of the year. Over a slightly longer period — since March 2015 — the shares are down almost 73%.

I can’t see things recovering any time soon, particularly following its decision to buy Wagamama. It may be an excellent brand, but I can’t help thinking that revitalising its other restaurants should be more of a priority for management than spinning yet another (large) plate. Since 40% of shareholders voted against the deal, it seems I’m not alone.

Moreover, the acquisition has surely come at the wrong time. Dining out is a discretionary spend. In troubled times, it’s one of the first things to go. The fact that people already appear to be reining-in their spending as we approach our official date of departure from the EU (29 March) is an ominous sign for those operating in the highly-competitive restaurant sector. Indeed, accountancy firm Moore Stephens revealed yesterday that the number of insolvencies in the industry has increased by a quarter in 2018 (to 1,219) and is now at the highest level since it began following the sector in 2010.

On a forecast price-to-earnings (P/E) ratio of nine for the next financial year and offering a tempting 6.7% yield based on the current share price, I can understand why some investors may be attracted to Restaurant Group. For me, however, it remains very much a value trap.

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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.