3 alarming reasons to avoid REA Group Limited

REA Group Limited (ASX: REA), the owner of had a stellar performance in 2017 with the share price rising over 34%. It’s a great business and many Australians have certainly used their website before particularly when looking to buy, sell, or rent a property.

Despite all that, I wouldn’t rush into buying their shares for the following reasons:

  • Loss of experience at the Board level. The company released a statement announcing that John McGrath, the founder of Mcgrath Ltd (ASX: MEA) had stepped down as a board member with immediate effect. Fairfax media reported that Mr McGrath, who owns REA Group shares worth $10.8 million may look to quietly sell his shares in REA Group and use the proceeds to fund a privatisation bid for McGrath. It was also reported that this resignation leaves the REA Group board without any director with first-hand knowledge and experience of the Australian residential property market, a worrying concern as REA Group challenges its competitor Domain Holdings Australia Ltd (ASX: DHG). I place great importance in the role a board and management team play in the success of an organisation and so this won’t be great news for the company.
  • Valuation. REA Group trades at a PE ratio of 37. Whilst the company has achieved some phenomenal growth in the past, I’m not sure if it can sustain it. Tech stocks have been trading at a premium but even global tech giants Apple (19) and Facebook (33) have been trading at lower PE ratios.
  • Uncertainty over international operations. Whilst Asia is a key market in REA Group’s long-term global strategy, in its last annual report the company reported a non-cash impairment charge of $182.8 million in relation to the carrying value of its goodwill for the Asian reporting segment. This suggests that whilst management’s growth plans in Asia may well work out, there is still some uncertainty and as such the company could not convince its auditors to maintain that goodwill amount.

Overall, I think investors can do better elsewhere such as these three revolutionary companies.

The Disruptors: 3 Revolutionary Aussie Companies to Back for 2018

We’re living in one of the most exciting times in investing history. Innovation and a booming culture of entrepreneurship are constantly creating new companies with the potential to make forward-thinking investors very rich. Now more than ever, one small, smart investment could make a huge difference to your wealth.

That’s why at The Motley Fool we’ve been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Cochlear or REA Group.

We’ve found three exciting companies that we believe re poised to perform in the new year. Click here to uncover these ideas!

Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can follow Kevin on Twitter @KevinGandiya.

The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.