Shares in former growth darling Plus500 (LSE: PLUS) have plunged over the past few weeks, falling more than 50% since the beginning of February. After this decline, the Plus500 share price is trading at a depressed forward P/E of 5.1 and supports an above-market dividend yield of 17.6% — according to current City forecasts.
These multiples might look attractive for value-seeking investors. But before you buy into Plus500, I think there are several things you should be aware of.
Shock warning
Plus500’s fall from grace began at the beginning of February when the company warned profits in 2019 would be “materially lower” than City forecasts. That’s mostly due to the introduction of the new EU rules which limit the amount of money retail traders can borrow from their brokers.
This warning came as a shock to investors and analysts alike because, even though the new EU regulations were introduced in August, CEO Asaf Elimelech declared at the end of 2018 that the 12-month period had been a “landmark year” for the group. He also said the business was “gaining market share in our current markets” as well as “growing rapidly in new jurisdictions.” The CEO also went on to inform investors that the firm was bringing on board new “high value customers,” which are exempt from the new EU rules.
The fact that the company issued such an upbeat trading statement, and then revised its forecasts only a few weeks later, is a big red flag for me.
Insider selling
Another red flag is the fact that Plus500’s managers have been dumping shares in the business over the past 12 months.
In September, five of the firm’s founders halved their stake to around 8%, selling 9.4m shares for a total of £145m. Their last big sale was in September 2016, when they pocketed £100m selling 15.5m. Following these deals, founder ownership has fallen from approximately 30% to less than 10% in just a few years.
The heavy selling suggests to me that the managers could see dark clouds growing over the group long before the recent warning.
Misleading figures
The final red flag against the company I’m going to outline is its accounting. When Plus500 moved its listing from Aim to the main market last June, it had to issue a new investor prospectus, which it duly did. In the prospectus, the company claimed that it had made “no net gains” for three years from betting against its customers. As it turns out, this was a mistake.
According to a recent press release from Plus500, it “suffered a negative revenue impact of $103m in the 2017 financial year due to strong client trading” and the company “incurred a negative revenue impact of $19.5m for the financial year ended 31 December 2016.”
If such a significant accounting error can pass through the group without being corrected, that’s concerning.
The bottom line
Considering all of the red flags above, I think it might be best to avoid the Plus500 share price after recent declines. The stock might look cheap, but I think there could be further declines on the cards if more bad news emerges.
