In the light of recent results and a sharp share price fall, should investors now buy or avoid this stock?
What’s really gone wrong?
I’d previously focused on historic measures that suggested the group remained profitable and cash generative. I thought that a modest return to growth would support higher profits and a share price recovery.
I didn’t spot the elephant in the room, which is that people aged 50 and over no longer want to be treated like oldies.
Older, wiser and online
Customers aged 50-70 may have greater spending power, but having spent 30+ years working, they don’t want to waste their money. Most people in this age bracket are computer literate and shop online. They buy the same insurance policies as younger consumers and expect to pay the same.
Saga’s mistake was to carry on trying to sell standard services at elevated prices. Thanks to the internet and price comparison websites, this approach doesn’t work very well anymore.
What’s next for Saga?
Chief executive Lance Batchelor has admitted that the firm’s current business model may be unsustainable, saying “Saga cannot grow without a clearly differentiated offering to its customers.”
Mr Batchelor’s first idea is to offer three-year fixed price insurance to customers. Is this enough? I doubt it. If the prices are truly competitive, then Saga runs the risk of under-pricing its services for years two and three. If the prices aren’t competitive, then customers probably won’t buy in the first place.
Saga shares have now fallen by 54% and look cheap against historic earnings. But with profits falling and no clear solution in sight, I’d stay away for now. I think there are safer options elsewhere.
Double or quits?
Shares in spread betting and CFD trading firm Plus500 (LSE: PLUS) fell by another 20% or so on Friday. They’ve now lost nearly 60% of their value over the last year.
As my colleague Rupert Hargreaves explains, the stock now appears to be very cheap, with an amazing forecast dividend yield of about 19%. However, I think there’s very little chance that shareholders will enjoy such strong returns.
Plus500’s revenue fell by 65% during the first quarter of 2019, compared to the final three months of last year. The company says that a lack of market volatility is to blame, but it’s also clear that there are wider problems.
Easy come, easy go
It made out like a bandit during the cryptocurrency boom, as inexperienced traders rushed to bet on Bitcoin. This frenzy is now over. The firm’s performance has also been hit hard by regulatory changes aimed at protecting inexperienced traders from big losses.
Even before Friday’s update, analysts expected Plus500’s profits to halve this year. Further downgrades seem likely to me.
Investors wanting exposure to this sector should focus on its more upmarket rivals, in my view. UK-based IG Group and CMC Markets offer high yields, strong cash generation and have a long, respectable track record.
Israeli newcomer Plus500 has always been an outsider. The firm’s founders have rushed to sell stock over the last couple of years. I’d follow suit if I still owned the shares. One to avoid, I think.
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Roland Head owns shares of IG Group Holdings. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.