2 Neil Woodford stocks I wouldn’t touch with a bargepole

G A Chester explains why he’s steering clear of these two Neil Woodford-backed stocks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Neil Woodford-backed Circassia Pharmaceuticals (LSE: CIR) raised £191m at 310p a share and had a market capitalisation of £600m when it listed on the stock market in 2014. It was lossmaking but had high hopes for a range of allergy treatments it was developing.

In 2015, it raised a further £263m to fund two acquisitions. One gave it infrastructure in key markets for the commercial launch of its allergy treatments (“once approved”) and the other gave it a pipeline of complementary products in the respiratory diseases space.

Unfortunately, its flagship cat allergy treatment failed a Phase III study in 2016. And after its house dust mite treatment also failed, it abandoned its entire allergy programme. It was left with its respiratory products and a deal for certain commercial rights to two AstraZeneca products. The shares are now trading below 100p and its market cap is about half that of its flotation.

Testing patience

Circassia was at one time a top 10 holding in Woodford’s Patient Capital Trust but he shifted it into his Equity Income fund last August at a time when he was increasing Patient Capital’s exposure to riskier unquoted stocks. Not that Circassia isn’t risky. It’s never made a profit and analysts are expecting an £86m pre-tax loss on revenue of £47m when it posts its results for 2017. And losses are forecast to continue for the foreseeable future.

Due to the uninspiring history and lossmaking outlook, I view Circassia as a stock to avoid at this stage. I also note that a hedge fund (Mangrove Partners) has increased its position significantly over the last 12 months, from below 2% to 5.42%. I’m not privy to Mangrove’s thesis on Circassia but it tells us: “We focus on companies that are executing a flawed business plan or strategy, engaging in fraud, or capitalizing on a fad.”

Frankenstein creation

Another Woodford-backed company on my list of stocks to avoid is BCA Marketplace (LSE: BCA). Not all companies grow from small acorns. Some £1bn businesses are constructed within the blink of an eye. Team an entrepreneurial executive with a corporate finance house, and heavyweight backing from City fund managers and banks, and a new industry giant can be conjured by buying up a clutch of existing businesses.

BCA is one such company. An AIM cash shell in 2014, it’s now a £1.4bn FTSE 250-listed group. It’s a major player in the secondhand vehicle industry, with businesses across the market. I’m not keen on Frankenstein creations of this type. They’re often launched in a ‘hot’ sector and if the sector is cyclical, there’s every risk of overpaying for assets at the top of the cycle. I fear this could be the case with BCA.

The group reported rising revenue and profit in its half-year results in November but as my Foolish friend Roland Head noted, the car market looks like it could be heading for a downturn. BCA’s net debt of £287m may not seem too onerous but I see considerable risk behind the face of the balance sheet (and off it) in the event of a downturn. A forecast P/E of over 16 at a share price of 167p offers an insufficient margin of safety for the risk, in my view. I also note that four hedge funds have disclosed short positions in the stock, totalling 2.35%.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester 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.

More on Investing Articles

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »