The ‘gating’ of fund manager Neil Woodford’s flagship Equity Income fund this week has left many private investors unable to access their investments and fearing big losses.
I don’t want to say too much about Mr Woodford’s problems. Instead, I want to focus on two high-profile companies that are both linked to Woodford Investment Management. Are these stocks you should be buying amid the fallout from the fund’s suspension?
Back on track?
Shares in subprime lender Provident Financial (LSE: PFG) rose by more than 10% last week after the firm managed to fight off a hostile takeover from its smaller, loss-making rival Non-Standard Finance.
You might wonder why such a deal was ever considered. Essentially, it appears to have been orchestrated by Neil Woodford, whose funds own more than 23% of Provident and 25% of NSF.
Mr Woodford and two other major shareholders control more than 50% of Provident shares, enabling them to force through a deal. But they encountered strong opposition from a number of other big Provident investors.
Although in voting terms a deal was still possible, NSF says that the expected number of minority shareholders would have prevented the combined firm from satisfying regulatory capital requirements.
I see this as a big win for PFG shareholders. As I’ve explained before, in my view this deal was only ever likely to benefit NSF shareholders.
Moving on
So should you buy Provident Financial today? The stock isn’t without risk. Its turnaround is proving to be long and complex. But management is making progress, in my view.
The firm’s Vanquis Bank operation signed up 13% more customers during the first quarter of this year than last year. And Moneybarn vehicle loan volumes were 40% higher than during the same period of 2018.
Analysts expect adjusted earnings to rise by 10% to 53p in 2019, putting the stock on a forecast price/earnings ratio of 10. A 33p dividend is expected, giving a yield of 6.4%. In my view this could be a good entry point for long-term investors.
Patience could pay off
One of Mr Woodford’s biggest cheerleaders for many years has been investment platform Hargreaves Lansdown (LSE: HL). This firm is by far the largest of its kind in the UK, with £97.8bn of assets under administration and nearly 1.2m active clients.
From an investment perspective, it’s hard not to respect the incredible track record of this firm. Hargreaves boasts an operating profit margin of more than 60% and has delivered share price gains of about 850% since its 2007 flotation.
But despite lagging the market for the last three years, Mr Woodford’s Equity Income fund continued to feature in HL’s Wealth 50 list of “our favourite funds“. The Equity Income fund was only removed from the Wealth 50 after trading in the fund was suspended.
Investors seem to have taken a dim view of the firm’s loyalty to Mr Woodford and the Hargreaves share price fell by about 15% last week.
Is this a buying opportunity? Perhaps. But I wouldn’t rush in.
Earnings growth seems to be slowing at the firm, and I suspect last week’s events could be a short-term headwind. Although I’m sure these problems will blow over, I’d want an entry price closer to 1,700p if I was to buy today. For now, I’d rate the shares as a hold.