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Here’s why Purplebricks shares fell 25% yesterday

A Purplebricks 'for sale' sign stands outside a house

Many UK investors will have heard of Purplebricks (LSE: PURP) and seen its TV ads or signs outside homes for sale. But why did Purplebricks shares lose around a quarter of their value yesterday?

What happened?

The online estate agency has revealed that it expects to make a provision of millions of pounds – potentially up to £9m – because it didn’t properly serve legally required documents to tenants explaining that their deposits had been put into a national protection scheme. Its failure to inform tenants within 30 days means they should be able to claim back up to three times the value of the deposit, up to six years after the event.

The Daily Telegraph reported on the blunder first, leading to a response from the company. The paper said the figure could theoretically be as high as £30m.

Overall, the debacle gives the impression of a company that’s cutting corners and doesn’t have the systems in place to do the basics that are legally required of it. No wonder the shares fell. Investors will be fretting about the immediate cost but also what it says about management’s competence. It also makes me wonder what other skeletons might be in the closet.

Is Purplebricks stock now a good buy?

But does the price fall means Purplebricks shares are cheap enough for me to buy? I don’t think so. This latest mistake was avoidable and follows on from an already poor share price performance. The shares are down more than 70% in the year to date.

A trading update in November warned that despite a strong period for the UK housing market in 2021, buoyed by the stamp duty holiday, the six months to 31 October 2021 were more challenging.

The online agency has more recently said the UK housing market is set to be closer to “normal” in 2022, following a “hectic” last 18 months. New business is slowing down already. 

This isn’t the only issue the firm faces. Hundreds of current and former Purplebricks agents are pursuing legal action against the company. They claim they’re entitled to benefits such as holiday pay, pensions and national insurance contributions. The company has moved from self-employed agents to employing staff directly. Similar moves at companies like Provident Financial have been bad news for shareholders as costs have risen.

Competition in online-only, or hybrid agency models is another issue for management and investors and one that’s no doubt having a negative impact on Purplebricks shares.

On the brighter side perhaps the shares are now poised well for a contrarian gamble? They detianly have fallen a lot. Purplebricks does also have strong brand awareness. 

Better options

I hold shares that are connected to the property market. The first is Property Franchise Group. It manages around 55,000 properties and is also involved in house sales. Between 2015 and 2020 its revenue went from £7.1m to £11m. It’s a high-growth share on an undemanding valuation. I also like — and own shares in — housebuilder Persimmon. It has best-in-class margins and a lot of cash on the balance sheet to pay the dividend and buy more land.

I much prefer to hold Property Franchise Group and Persimmon over Purplebricks shares – though both could fall if the property market slumps. I fully expect the latter’s share price to keep falling.

The post Here’s why Purplebricks shares fell 25% yesterday appeared first on The Motley Fool UK.

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Andy Ross owns shares in Property Franchise Group and Persimmon. 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.