By Tom Winnifrith | Monday 2 January 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Lucian is still on his grand tour of Eastern Europe but before he left he told me his two sell tips of the year for 2017. The first, natch, was Cloudtag (CTAG) HERE. The second, at 384.5p, is Plus 500 (PLUS).
The Market reaction a few weeks ago to news that the FCA was proposing stricter rules for CFD products was predictably savage. Plus has rallied a little since then, in part down to the fact that Odey Asset Management, has repeatedly blundered into the market to average down on Plus 500 helping to cushion the fall.
Odey has had a disastrous 2016 showing the reverse Midas touch on almost every single one of his macro and micro calls. He has repeatedly doubled down on disastrous bets only compounding the misery of the dwindling band who entrust him with their cash. At some stage there is a very real danger that a wave of redemptions will force him to exit some of his abject calls and with a stock like Plus it is hard to see any other buyers.
Plus was quick to point out that only 20% of revenues come from the FCA regulated subsidiary. In contrast IG Group whinged about “certain firms, often operating from outside the UK” not being directly affected by the proposed changes, a clear reference to the likes of Plus 500, thus it would seem underlying its own greater vulnerability, due to its larger exposure to FCA regulation.
Indeed, IG is correct. It is precisely the practices of the likes of Plus 500, which are being targeted by the FCA and I think it naïve to suppose that the company will be able to carry on as before by simply switching UK clients to Cyprus, bypassing the FCA. The spotlight is now firmly upon the sleazier aspects of the industry and I believe that the Cyprus regulators will be forced to act in a similar vein, at least as far as UK and other European citizens are concerned. Indeed I revealed even before the FCA acted that the bubbles were on the case (HERE). Plus dismissed this as a nothing. I sense it is very much a sign that the zeitgeist across Europe is very much against it.
This poses an existential threat to Plus 500. Its rating is now 5.6x last years earnings. This may look cheap but don’t be fooled. Plus’s business is heavily dependent on its clients losing money by allowing them to take highly leveraged bets against the house. In other words, its profits, to a far greater extent than IGs, derive from client losses.
It is, in short, this type of business that the European authorities (German regulators BAFIN have now followed the lead of the FCA) are targeting and if they succeed then Plus 500 has no business. So Plus as a short is the second sell tip of the year from the Bard of the Boleyn. Incidentally, Lucian has hedged his own short a little by going long of IG (IGG), but the collapse of Plus is the central thesis here.
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