Shares in troubled online trading firm Plus500 Ltd (LSE: PLUS) rose by more than 20% on Tuesday morning, while those of e-invoicing firm Tungsten Corp (LSE: TUNG) rose by 12%.
Both companies have been big fallers recently. However, noted City hedge fund Odey Asset Management bought a significant number of shares in both firms on Friday.
Is this a buy signal for private investors?
Plus500
Plus500’s share price collapsed on 18 May, after the firm announced that it was implementing enhanced anti-money laundering checks on existing customers.
As a result, Plus500 was unable to accept new customer sign-ups and was preventing existing customers from withdrawing funds or opening new positions.
On Friday, the firm revealed that the changes and resulting disruption were the result of an FCA-mandated review into the firm’s anti-money laundering procedures. Following the review, Plus500 was immediately required to implement more thorough checks.
What’s Odey doing?
Odey’s stake in Plus500 first became public in March 2014, when it reported a 6.15% holding. Since then, the asset management firm has continued to build its holding, which reached 13% on 22 April 2015.
Odey has continued to buy heavily since the 18 May announcement, increasing its holding to 16% before Friday’s clarification, and to 19% immediately afterwards.
Odey’s position in Plus500 has been built up through many purchases, and it’s not possible for us to know Odey’s average purchase price, nor the reason for its latest buys. In my view, there are two likely explanations.
One is that Odey believes Plus500 will recover and that the shares are currently a bargain.
The second possibility is that the hedge fund is buying now to reduce the average share price of its holding, and aims to liquidate its holding following a short-term rebound.
Buy Plus500?
My view is that even if no further problems emerge, the current disruption is likely to have a disastrous effect on Plus500’s full-year profits.
I suspect that many customers won’t return to this platform. The medium-term damage to Plus500’s business could be severe. We just don’t know.
Tungsten
In many ways, it’s a similar story at Tungsten. In a trading update on 14 May, Tungsten said that full-year losses were expected to be about £31.2m. The firm admitted it would need more cash to fund its growth strategy.
A week later, Tungsten announced a £15m placing to strengthen its cash position. The shares fell to 71p ahead of the placing, but rose after the firm said it had managed to raise the money at 80p per share.
Odey increased its stake from 13% to 15% on 22 May, presumably as part of the placing.
As with Plus500, there’s no way of knowing whether Odey is averaging down on its Tungsten stake to cut its losses, or to increase its long-term stake in the firm.
Is Tungsten a buy?
Tungsten shares now trade 36% above last week’s placing price. This is why copying institutional buys in your own portfolio can be very risky. By the time private investors know about a trade, the opportunity may have passed.
Today, Tungsten is still valued at £129m, despite being expected to report a £31m loss on revenue of £22m in 2015.
