It’s a little frustrating to fail to notice the potential of a business before its shares go on a terrific rise. Worse still — and positively chastening — is if a company rockets after your research has led you to a negative view.
Shares of IQE (LSE: IQE) and Plus500 (LSE: PLUS) have more than doubled over the last six months and they’re now among the biggest companies on AIM. Cardiff-based semiconductor wafer specialist IQE has only recently come on to my radar, while Israel-domiciled online trading platform Plus500 is a company I’ve been bearish on ever since reading its 2013 stock market admission document.
Huge re-rating
IQE has been at the forefront of the compound semiconductor industry for more than 25 years. It has a wealth of patented intellectual property and is recognised as the leading global supplier of advanced wafer products and services.
Until recently it had traded on a rather depressed price-to-earnings (P/E) ratio, for example, a forward P/E of nine on a share price below 20p when my Foolish friend Rupert Hargreaves pointed out the value in the stock three years ago. Today, the shares are at 140p and the forward P/E is 43.
Explosive growth potential
What’s changed? Summer speculation that IQE technology will feature in the new iPhone 8 certainly hasn’t done it any harm. However, the shares had been rising strongly well before this with investors seemingly beginning to recognise a huge volume opportunity that looks to be opening up. All manner of companies are bandying about the phrase du jour ‘Internet of Things’ but few with as much justification as IQE.
After a quarter of a century, it looks to me like the company’s time has come. A share price of 140p and P/E of 43 could look very cheap in a few years time and I rate the stock a buy.
Unbelievably cheap
Shares of Plus500 have increased eightfold since their listing at 115p four years ago. The business is delivering tremendous earnings growth, yet trades on a forward P/E of just 9.5 at a current price of 915p.
And it’s not one of those companies with iffy paper profits. It’s generating oodles of cash, buying back its own shares with a vengeance and paying shareholders terrific dividends. The forward yield is a juicy 5.8%.
I remain bearish
My negative view of Plus500 — which enables retail punters to bet (and collectively lose) on the movements of currencies, commodities, shares and so on — stemmed from my doubts about the long-term sustainability of the business model. It also came from the company’s history of fines and/or warnings on such things as “certain financial promotions,” “lack of risk warnings” and “regulatory failures relating to transaction reporting.”
At one stage, it looked as if I was right to be sceptical. The shares crashed when the Financial Conduct Authority ordered the company to freeze its activities due to inadequate anti-money-laundering systems and procedures. However, this proved a temporary setback and the shares have gone on to new all-time highs.
Nevertheless, my concerns about the business model and regulation continue to lead me to view Plus500 as a sell. My view is buttressed by the fact the founders/directors were at one stage very keen to dispose of the business at 400p a share and have since netted themselves over £100m in share sales at 650p.
