Neil Woodford will probably be hoping that the recent collapse of Provident Financial will mark the end of a bad run for his funds.
For the sake of his investors, I hope there's no more bad news on the horizon. But much as I respect Mr Woodford's track record, I fear that storm clouds could be gathering.
The company I'd like to look at today is online estate agent Purplebricks, which was the ninth-largest holding in Woodford's flagship Equity Income Fund at the end of July.
For those who aren't familiar with this story, Woodford invested in Purplebricks before it floated on the stock market. The fund manager is now the AIM-listed firm's largest shareholder, with a 28.7% stake that’s worth about £365m at current levels.
However, there's no denying that Purplebricks' current valuation can only make sense if the group delivers a colossal amount of further growth. This business was recently described by Paul Scott as "ludicrously highly valued".
Stockopedia's algorithms have consistently given this stock a low StockRank and classified it as a Momentum Trap. Today I’m asking if this is a fair assessment, or if this is a case where human judgement is required to understand a stock’s potential?
The bull case
For bulls, the investment case for Purplebricks appears to revolve around two possible scenarios:
The first is that the company will achieve Rightmove-like levels of dominance in the UK.
The second scenario is that it will gain a substantial share in the US market, where it's just beginning to launch.
UK market: In my view, comparisons with Rightmove are flawed. Rightmove is a listing site. This is a business naturally suited to a monopolistic solution, as house-hunters benefit from getting all the information they want in one place.
Purplebricks is somewhat different. It faces competition from every estate agent in the UK. Many of these businesses are long established and well known in their local areas. Although many charge exorbitant fees for doing very little (in my opinion!), there's no reason this can't change.
What's to stop estate agents offering a cut-price fixed fee service and a more expensive full-service option? I can't see estate agents giving up easily in the face of online competition, especially as most also operate as letting agencies.
Overseas expansion: Purplebricks' move into Australia might well be successful, but…
