Plus 500 could it be a minus?

13th Jan '19 by Ken Lowes

190 comments 20173 reads

Having been out of the market since October 2017, as mentioned here at the time, it is obvious that I am a cautious investor, which perhaps comes from my many years building a financial services company. I am not ready to buy back in yet, but I have been preparing the way and looking at companies that I believe may make good investments. Plus 500 stands out like a beacon of light. As I completed my analysis, I wanted to buy there and then but it was Saturday--an almost perfect company, the thought flickered through my mind “if it is too good to be true” but I dismissed it immediately. When I awoke this morning, Plus was on my mind and I was directed to the Stockopedia blog. I tend to take notice of such happenings as they have both saved and made me money in the past—and there it was an observation from Ed Croft dated 30th May 2018 directing me here https://ftalphaville.ft.com/2018/05/29/1527566400000/Plus500--past-performance-is-no-guide-to-the-future/ with an associated further article. I returned to my desk and wrote across the analysis sheet “they would say that wouldn’t they”!! and binned it.

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AnonymousUser252054

13th Jan '19

No matter what people think of Plus500 (LON:PLUS) it always strikes me as odd that IG Group (LON:IGG) are held up as a beacon of virtue. IG Group (LON:IGG) who trampled over their own customers to get out when the Swiss franc fell, whose clients have in fact always been routinely exposed to limitless losses, and who in July thought they could side-step the new ESMA regulations by re-directing EU clients onto their non-EU platforms!

shipoffrogs

I think the most telling metric is that its profits are now more than half those of the very profitable London Stock Exchange and if recent growth extrapolates forward will soon overtake the LSE. Dissonant?

aflash

Please note huge increase in short interest;

https://shorttracker.co.uk/company/IL0011284465/

Nursemaid

Well flagged aflash, I was on the brink of finally investing,,not touching anything that is being heavily shorted, especially in this market! What do they know??

Ramridge

14th Jan '19

Hi Ken -
Our own Graham Neary has covered in some detail Plus500. SCVR of 4/7/18 and SCVR of 7/6/18.
I consider Graham to be a top notch analyst and when he says the following, you have to sit up and take note.
"I could be wrong, but I suspect that this company will either blow up in a black swan event or be shut down by regulators at some point. The day is coming soon when it will have to deal with ESMA rules - that will be very interesting indeed."

timarr

It's interesting to do a comparison of Plus500 (LON:PLUS) against IG Group (LON:IGG) and CMC Markets (LON:CMCX). The thing that stands out is how much better the quality metrics are for PLUS - e.g. a return on capital of 150% compared to 33% for IGG and 17% for CMC.

When you see this kind of disparity you have to look at how it's being achieved because, according to the Law of One Price, if two companies are offering similar services then the dead hand of market competition should drive profits to the same level. It's just capitalism - outsized profits attract competition.

I've no interest in investing in an Israeli financial company but if I was looking to put money in PLUS I'd want to understand what their competitive advantage is. Either they have some kind of differentiation in service or some form of moat - and then you have to look at whether or not the competition can replicate or breach it - or they're taking more risks.

The relative pricing and the shorting activity suggests that the market is dubious about whether they can maintain their current levels of returns.

Timarr -
When a company consistently outshines its peers in a big way, then either it has a terrific moat or it's a con. Bernie Madoff managed to spin his deceit for many years before the whole thing imploded under his feet.

On several occasions over last year, I have looked at Plus500 in some detail and tried to identify its moat. I cannot find anything it does that justifies the huge disparity in its performance compared to its competitors.

Since capital preservation is my number one investment priority, Plus500 presents a risk too far for me.

When a company consistently outshines its peers in a big way, then either it has a terrific moat or it's a con. Bernie Madoff managed to spin his deceit for many years before the whole thing imploded under his feet.

Hi Ramridge

There are other possibilities that explain an excess return. Taking greater risks than the competition would be one area - that's not a con, it just means that the company can serve opportunities and customers that less risk adverse competitors can't or won't. That in itself is fine, as long as they have better risk controls.

There are cases of financial services companies that are able to do this, particularly if they're using advanced data driven analytics against different business models. I don't say it's common, but it is possible.

Snoo

Perhaps a contrary opinion here. but I feel that PLUS does a much better job of marketing itself to the very bottom of the market - the beginners and wannabes. So I would also think markets such as Bitcoin to be really popular with them, whereas I'd think not many would trade Bitcoin on IG.

I signed up to see what it was all about and the platform is very different to IG. Like fellow Israeli company Etoro, the fee structure is very opaque. A beginner might see the charges for IG (£8/trade) and compare that unfavourably to these CFD sites (no upfront charge but interest charges).

I'd expect them to have larger customer numbers, but in terms of quality it isn't like-for-like. I don't think the numbers are fabrication but I do think they might be vulnerable to more regulations.

Hi Timarr -
OK, but a moat is not necessarily protected patents or better technology. A company can produce superior performance through having superior operational and financial processes and strong management. That also qualifies as a moat in my book.

Plus 500 could it be a minus?

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Ken Lowes

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