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Purplebricks Is it time to Sell at 470p or Buy the Watchdog blip. I am leaning to the Former.

By Lucian Miers | Sunday 6 August 2017

Disclosure: The author has a short position in one or more of the shares mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

I wrote recently that I wouldn’t want to be short Fevertree (FEVR) or Purplebricks (PURP) on the basis that clearly crazy valuations have a habit of getting crazier.

Watching the BBC Watchdog programme the other day prompted me to take a look at the company and I have to admit that there do seem to be a number of red flags. There are a few people that I respect (Paul Scott being one) who are long the stock and I would welcome a cogent case being put forward for buying the stock here. 

The current share price is more than the 460p target price issued by company broker Peel Hunt.  87p of this heroic valuation is arrived at by applying 10 times earnings of 8.7p estimated for the US business in the year 2021. The US business has not even been launched yet. (I don’t think cogent is the mot juste here)
Briefly, the bull case is that Purplebricks is a fast-growing business with the potential to disrupt the estate agent industry with a growing army of carefully selected, highly professional self-employed sales people. The company does not need the expense of high St. premises and the flat fee model hugely undercuts the traditional players allowing for explosive growth. Conversions from instruction to sale are currently running at an impressive 83% and the company’s reputation is second to none with uniformly complimentary comments on the independent review site TrustPilot.
The bear case is that the 83% conversion rate claimed is hugely exaggerated and that the real number is around 30%. The company’s sales force or LPEs (local property experts) are rewarded upfront by their share of the flat fee on instruction and, human nature being what it is, have little incentive to close a sale unlike traditional estate agents who are not paid unless a sale is completed. The TrustPilot reviews are sham and Purplebrick reviews on genuinely independent sites are mostly hostile.
I lean to the bear case and have shorted a small number of shares today but I am new to Purplebricks and intend to have a much closer look.  I think that bulls and bears would both agree that the eventual success of Purplebricks depends hugely on the instruction to sale completion rate and the quality of service offered by the LPEs.
In this regard both bulls and bears should be looking for evidence to corroborate or disprove the 83% rate claimed by the company and to get to the bottom of the apparent gulf between the Trustpilot reviews and those on other sites. 
This will be my next step, and I encourage others long and short to contribute to this process

This article first appeared on the Nifty Fifty website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of the next share tip from Tom & Steve shortly and a new shorting piece from Lucian next week click HERE

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