Plus500 - Minus500

Plus 500 had collapsed 400 pence from its recent highs and was now sub 400 pence again. Now make that -500 pence and sub 300 pence as it has collapsed another 100p or 30% while I have been writing this although I can't see any news!
I wrote this one up about a year ago as a volatile each way trading opportunity reflecting the risky / gambling nature of this one and its business model. I suggested considering buying it at around the 350p level and then subsequently suggested taking profits (too early as it happens) around the 500p level.

The shares went onto deliver even better returns as they kept churning customers and pumping out higher earnings and dividends as a result. So having traded it successfully I decided against going back into it as the business model was being called into question and the shares just seemed too volatile for my liking, but then I guess some folk like that until it comes to the downside!

Talking of which I thought I would revisit this one as it has been volatile to the downside this week and it made it into the Mechanical Compound Income Scores portfolio when I launched it in April. Additionally having updated the Scores this week it remains near the top of the list. As I said I have been reluctant to buy into this one again and the whole point of the Mechanical Portfolio is to see how just buying a portfolio based on high scoring stocks compares with my own decisions to see if the machine can beat me by avoiding human biases or if it is better to use them and pick and choose based on further analysis. However, given it is a list of just twenty names, including quite a few smaller AIM stocks like PLUS500, one would expect there to be quite a bit of dispersion in the results which is something I highlighted in a recent post.

What to do with it now then? Well for the portfolio as it is designed to be a Mechanical process with quarterly rebalancing at each quarter end - I will not be doing anything with it until the end of June when I see how it Scores at that point. I would however, suggest that you treat the current high score on this with a degree of caution.

This is because it remains to be seen what the outcome of the regulators actions will be and how long it takes PLUS to get customers suspended accounts unfrozen again. They suggested in their statement that 50% of their revenue comes from these UK accounts and that 55% were affected, so it would seem like around a 27.5% hit to their revenues at present. Going forward from here it remains to be seen how many customers will choose to stay and trade with them when their accounts have thawed and what effect this bad publicity has on their ability to recruit clients going forward. Thus I would suggest that we will probably see some fairly substantial earnings down grades on this one and probably a dividend cut too.
Thus the value, yield and growth scores are probably all mis-leading right now if my assumption above proves to be correct.

In addition you have to ask yourself whether the regulator could force them to shut down or sell their operations to another operator? I mention this because I recall last year Selftrade caused a furore when they started asking a whole load of intrusive questions of their clients at the behest of the regulator so they could "Know their clients" sufficiently. I seem to remember this ran for a few months and in the end they sold themselves to Equiniti. I note that Playtech (PTEC) moved into this area recently and I guess they could easily afford to mop this one up in some kind of forced sale type situation, but would they need to?

Summary & Conclusion
A bad week for PLUS shareholders as regulatory concerns about their checks on client ID's have hit them hard. On current forecasts it may seem like a tempting value situation down here and the possibility of lightning striking twice and being able to buy it at around 350p again. However, given the unknowns surrounding this situation and the as yet unquantified hit to their profits I would not be looking to go back into this one myself. Having said that though it is possible that this could all blow over quickly and the hit to their profits might be minimal, in which case a brave contrarian buyer down here might do very well. However, I have seen talk on twitter of others trying that earlier this week and suffering some steep losses already and even more today if they are still in it, so much for the 350 support level! So I would recommend some masterly inactivity on this one while waiting for the dust to settle and all the news to come out.