You’d be crazy to buy these two shares right now

Don’t be tempted by these low P/E ratios and 4%-plus dividend yields.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Shares of doorstep lender International Personal Finance (LSE: IPF) currently offer an eye-popping 7.6% yield while trading at a remarkably low 5.8 forward P/E ratio. But is this a bargain hunters dream come true or a value trap waiting to ensnare unwitting investors?

Personally, I’m staying well away from this globe-spanning sub-prime lender. Why? Because a series of legislative actions in Poland, the company’s biggest market, is having a hugely detrimental effect on IPF’s own finances. Legislation enacted in March capped fees doorstop lenders could charge consumers and limited the number of loans they could take out.

Unsurprisingly, lower fees led first-half profits from the combined Polish and Lithuanian home credit markets to fall from £28.3m to £21.3m year-on-year. And the damage isn’t done yet as IPF itself forecasts a potential £30m gross financial impact from the new rules, although it’s also confident it can mitigate up to half of these effects over time. Still, considering IPF’s worldwide home credit operations only provided £23.9m in pre-tax profits in the same period, this was a big hit.

And then in December the Polish government struck again as it proposed further caps on fees, which sent the shares tumbling a full 43% in one day. While the shares have somewhat recovered from this drubbing, I wouldn’t go anywhere near them until we know for sure whether the new proposed legislation will become law, and what effect it would have on IPF’s business.

Steer clear?

Now for spread betting. New government regulation is also the reason I’m avoiding CMC Markets (LSE: CMCX) despite its shares offering a 4.7% annual dividend yield and a rock-bottom 8.2 forward P/E ratio. The regulation in this case is a proposal from the FCA that would set relatively low margin caps for retail traders using CFD platforms, as well as force these platforms to disclose profit and loss ratios on all customer accounts

Now, for the time being this proposal is exactly that, and could end up being watered down or not enforced at all. But with the FCA claiming that over 80% of CFD traders end up losing money, I reckon regulators will look to score an easy political victory and back small retail traders at the expense of large platforms such as CMC Markets.

CFD platforms are, of course, fighting these proposals and point out that these regulations would simply force them to decamp to other, more lenient, territories. CMC Markets itself has publically considered moving to Germany, a move that would make some sense as it’s already that country’s largest CFD provider by market share. The bad news is that the FCA isn’t the only regulator taking a closer look at CFD trading and a slew of regulators across Europe have already begun a similar crackdown, meaning any relief from moving to Germany could end up being short-lived.

And beyond regulatory problems, CMC Markets is faced with its own trading difficulties. The latest financial figures for the half year to September showed pre-tax profits plummeting 29% year-on-year as lower revenue per client hit the company hard. At the end of the day, low barriers to entry, the constant battle to find new customers to replace those wiped out and the threat of regulatory action lead me to steer well clear of CMC Markets and other CFD traders.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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