A positive trading update led Plus500's share price to bounce about 30%. I was already coming to the conclusion that I didn't really want to own this business for the long term, so this seemed like a good time to sell - which I just did, at £11.61.
Why sell?
- Their business seems to rely on pulling in new customers and making money out of them, before they decide that actually gambling on CFDs is a mug's game. That doesn't seem very nice.
- As a company that basically preys on idiots they seem a ripe target for onerous regulation.
- Given the rapid turnover of customers I'm concerned that their position is vulnerable - I suspect they don't have a core of high-spending customers they can rely on year-in-year-out, they need to keep replenishing their customer base.
Why might this be a mistake?
- They still look cheap, particularly given the recent trading update, with a forecast P/E of only 8-9. They could easily double or treble from here if they keep growing and shrugging off regulatory attention.
- They have a very high return on equity, so can grow without using lots of cash.
- So they have very strong free cashflow.
- And they use that for lots of dividends and share buybacks, not blowing it on silly acquisitions.
So not an obvious decision by any means.
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