Shares in estate agency Purplebricks (LSE: PURP) have soared by around 10% today despite there being no significant news flow released by the company. Today’s rise means that the low-cost estate agent has now posted a return of 65% since the turn of the year and this may lead many investors to question whether a correction is now on the cards.
This view seems to be somewhat justified since Purplebricks is set to remain a lossmaking business in the current year. And while it’s expected to move from a red bottom line to a black one next year, this now seems to be fully priced-in by the market. Evidence of this can be seen in the company’s forward price-to-earnings (P/E) ratio, which presently stands at around 44.
Furthermore, with the outlook for the UK property market being rather uncertain, the lack of a margin of safety for new investors could lead to sub-optimal investment returns over the medium-to-long term. So it may be prudent to wait for a keener valuation before piling-in.
Waiting game
It’s a similar story for BT (LSE: BT-A). Its shares have outperformed the FTSE 100 by 58% in the last three years, although its current strategy could prove to be overly ambitious. That’s because BT is seeking to rapidly integrate the recently-acquired EE into a fast-changing business that’s seeking to become a dominant quad-play operator.
Although the strategy could pay off, it may also lead to short-term challenges for the business, since change can lead to risks and unforeseen problems. And with BT having significant debts as well as a large pension liability, its risk/reward ratio appears to be somewhat unfavourable at the present time.
While a major correction may not be ahead, BT may fail to outperform the wider market as it has done in recent years. With its shares trading on a P/E ratio of 13.8, it may be prudent to await a lower share price before buying-in.
Growth and value
Meanwhile, shares in Legal & General (LSE: LGEN) have still outperformed the FTSE 100 by 93% in the last five years despite falling by 13% since the turn of the year. With the company trading on a P/E ratio of just 11.5, it seems to offer significant upward rerating potential. And with Legal & General forecast to post a rise in its bottom line of 8% this year and 7% next year, its price-to-earnings-growth (PEG) ratio of 1.5 indicates that growth is on offer at a very reasonable price.
Furthermore, with Legal & General yielding 6.2% from a dividend that’s covered 1.4 times by profit, it seems unlikely that its shares will continue their recent fall. After all, with interest rate rises likely to be slow, higher yielding shares are set to remain popular and this could prove to be the key catalyst to push Legal & General’s share price higher over the medium-to-long term.
