Roy Mutooni, a portfolio manager and analyst at Sanlam Investments, said retail investor euphoria pushed Purple Group’s share price to unrealistic levels.
Purple Group is a South African financial services and technology group offering online trading, investing, and asset management.
Its main assets are its Easy Group portfolio, which includes EasyEquities, EasyProperties, and EasyAssetMgmt.
The Purple Group share price had an incredible run during the Covid-19 pandemic, increasing from 30c per share in February 2020 to R3.38 in January 2022.
However, since then, the EasyEquities owner lost its lustre and fell back to 79c per share in October 2023.
It raises the question of what caused the rapid rise and decline in the Purple Group share price and whether it offers value at these levels.
Mutooni told Business Day TV that Purple Group was one of the popular stocks among retail investors.
As the owner of EasyEquities, South Africa’s most popular investment platform, it was often recommended as a great stock.
“With popular retail stocks, you often get a disconnect with what the company is actually doing and the enthusiasm of retail investors,” he said.
“It almost becomes a religion. If you want to be with the in-crowd, you must own these shares.”
Purple Group enjoyed a great run while part of the in-crowd, but its share price collapsed after it no longer enjoyed the attention of retail investors.
“As an investor, you must be very careful of these fashionable stocks. Always stick to fundamentals, like earnings and management,” he said.
He explained that professional and institutional investors look at factors like earnings, price-to-earnings ratios, and the company’s outlook.
Despite the recent share price decline, Purple Group is still trading at a price-to-earnings ratio of 66 based on its 2022 earnings. This is significantly higher than many financial institutions.
South African banks, for example, trade at an average price-to-earnings ratio of 7.85. Should Purple Group trade at a similar ratio, its share price would be 29c.
“Clearly, there is a disconnect there. The Purple Group share price will go down until its valuation makes sense,” Mutooni said.
Ricus Reeders from PSG Wealth echoed Mutooni’s views, saying he is not interested in investing in stocks where prices are declining.
“Looking at Purple Group’s price graph, it is not looking interesting,” Reeders said.
The chart below shows the Purple Group share price over the last five years.