About Purple Group
Purple Group Ltd is a financial service and technology group that was founded in South Africa in 1998 by Mark Angus Barnes. They are a listed company on the Johannesburg Stock Exchange (JSE) and can be found under the ticker code (PPE) in the “Financials – General Financial” sector.
Most of us are familiar with the web-based investment platform known as EasyEquities.
Easy Equities (EE) is definitely the groups star asset, it is the platform that propelled Purple Group into the spotlight. However, Purple Group also engages in derivative trading and asset management, operating through the segments GT247 and Emperor Asset Management
Below is a chart of Purple Group’s 5 year performance.
Purple Group has returned 111% over 5 years, however, I want to point out that from 2016 to April 2020 the share moved nowhere, in fact it traded in a downwards direction, to a low of 22c at one point - 68% loss (unrealized).
If someone sold at the beginning of 2020 after holding for 4 years, they would have missed the entire move upwards from April/May 2020.
The key takeaway from this is that staying invested is the best option over the long term - especially if it is a quality business. The fundamentals of a company will eventually reflect in the share price - it’s all about being patient.
Remember, if you are a long term investor, investing should be boring, wealth isn’t built overnight and sometimes sitting on your hands is the best thing you can do. Ask those that sold their PPE shares at the beginning of 2020.
The Pandemic, and Retail Appetite
As you can see the share only really took off in April/May 2020, which coincides with the pandemic and when the world went into lockdown.
Many new retail investors rushed to buying stocks and became “traders” overnight, all in the hopes of making money. This trend has equated to increased brand value for EasyEquities and has boosted their account numbers. In fact, over 1 million people have signed up to use EasyEquities and this will only increase over time as the brand becomes ubiquitous. This bodes well for the group at whole.
Price and Value
I often write about price and value, but what does it mean exactly and how does one work out the true/intrinsic value of a company?
That is honestly a really difficult question, it involves complex arbitrary calculations, but I wont get too much into the calculations today, I’ll save that for a video in the future. If you are interested in learning more about it, you can start reading up on the Discounted Cash Flow (DCF) model.
An easy to remember trick is to look at insider selling, usually insiders will sell stock when they think the company is at fair value. Because why would they sell below intrinsic value?
Insiders sell for numerous reasons so this shouldn’t be seen as the only reason for selling. Insiders might run into financial problems, they may need to pay tax, or they may just be wanting to move into cash to buy a house, etc.
Looking at what the insiders are doing is a great starting point.
From the lists above we can see the founder himself, Mark Barnes, has been a net seller of PPE shares with his latest sale at R1.36 on the 22 April 2021
Shareholding and Future Prospects
The shareholding is broken down as follows as of June 10th, 2021.
Private companies = 40.9%
General public = 37.3%
Individual insiders = 13.1%
Institutions = 8.6%
Let’s have a closer look at who these people are:
I’d like to point out that there is decent insider ownership, which tells me that management is aligned with the company and its growth. I always like to look for insider ownership because then I feel as if management is making better decisions, not only to benefit themselves, but for the shareholders too, because they are shareholders, too.
What I don’t like to see is aggressive insider selling, but as mentioned earlier it isn’t always a bad thing. A founder may be nearing retirement and they may just be wanting to take a less active role in the company, or they may have other ventures that they would like to pursue. It is something to be aware of because it might be signalling something bad within the company, but in this case I don’t suspect this with Purple Group.
Let’s take a look why
Looking at the shareholder's, we can see that Business Venture Investments 1847 (BVI) is one of the largest shareholders and currently owns 17.4% of Purple Group. Mark Barnes owned 50% of BVI and has been reducing his stake in this private company, too. So, not only does he have a personal interest in Purple Group, but he also has an indirect interest in the group through a private company (BVI).
Purple Group’s ownership structure is changing, and Mark Barnes is cashing in. The Investment firm Firefly is set to acquire an 18% stake in Purple Group. Firefly is headed by Paul Rutherford of Nire Capital, a “technology-focused, business-focused” investment company.
The option allowed Firefly to acquire up to 134.5 million shares in Purple Group. 13.3% of the shares issued by BVI at a price of R1.10 per share. As of Friday’s close the newest shareholder is getting a discount of up to 32% on the company’s stock, immediately benefitting from a higher price. They are a long term player and are there to drive the next chapter of growth. Don’t worry they wont be dumping the shares, these guys are not in it to make a quick buck. I’m confident that they want to grow the business long term which would inevitably mean they make more money, too.
BVI owned 33.8% (332 million shares) of the Group and once these options for all the shares are exercised, ownership will be reduced to 15.5%. This means Mark Barnes is significantly reducing his exposure to Purple Group to make way for the next chapter of the company.
Valuation
For those that follow me on Twitter, I’ve said this for awhile already; “Purple Group is currently overvalued”. But the stock is a retail favorite and people are prepared to pay a premium today for the company’s future earnings, mainly because they believe in the long term prospects of the company.
One thing to remember as a long term investor, companies need time to grow into their valuations and sometimes they can run ahead of themselves - stocks don’t only go up. This means there will be periods of underperformance as stocks revert to their mean over time, that means if you buy at higher levels you may be like the early investors of (2016-2020) who sat with drawdowns of up to 68%. This doesn’t mean the stock is bad or that it’s time to sell, it means it is consolidating and growing into earnings before the next move higher. You could hold a stock for 4 years and have no meaningful gains, but in year 4-5 it shoots up 100-200% and makes it all worth it.
For those wanting to dive deeper into Purple Group’s 2020 financials, here is the research below of why I think they are overvalued.
Where to from here?
I’m a long term buyer of Purple Group, even at current levels. I continue to accumulate as many shares as possible because this could turn out to be one those those successful companies we read about in the future. They have a long runway for growth and have massive tailwinds behind them.
Even with Mark Barnes selling, it doesn’t deter me from wanting to accumulate. Our investment journeys are all different and we all make decisions based on our personal circumstances. Mark Barnes’s actions are no different.
If you are worried about entering at these levels, check out my video below where I explain perfect entries into this company. But, like I said, this is a long term hold, so as long as you keep your emotions in check and keep stacking, I think you’ll do just fine :)
My price prediction for the stock towards the end of 2021 is between R1.80-R2.00 a share, and then I think the share price will stall. At this point, we will need to see management implement the next stage of growth before there will be a rush of new investors.
Watch the video here:
Stay safe everyone,
See you next week :)