The shocker from Plus500 (PLUS) provides useful lessons for bulls and bears. Little more than a year ago I suggested selling the shares at £11 – and you may be forgiven for thinking that I have just returned from doing victory laps around the garden...
...but sadly that is not the case. I previously wrote; “The shares hit an all time high of 1234p last week. On Thursday the management announced that it was selling a lot of stock at £11 per share raising £80m between them. This represents around 6% of the outstanding shares and reduces their collective holding to 16%. I have joined them and still believe that Plus will at some point run out of luck. Most crypto punters are long and if, as I suspect will happen, they are heading for nasty losses, they might have to go back to their day jobs which will not be good for Plus. I am short at £11.” However, after I opened the short, the stock proceeded in a straight line to £20 and I closed at a nasty loss. This was not the first time that I had lost money shorting Plus and I vowed not to trade it again, making February’s profit warning and now its catastrophic follow-up even more galling.
The obvious lesson here is that being eventually proved right is no good at all and that timing is everything. This means that while it might be necessary to cut or pare a position a few times, one should always be prepared to put it back on if the story hasn’t changed. The story, in my view, has still not changed with Plus. Naturally it blames market conditions for its woes: “Subdued financial markets in the quarter weighed on revenue for the period”. Granted, most forex might have been range-bound, but the S&P, probably the most popular equity contract out there, has risen around 20% in the quarter. Subdued? If that’s subdued it would be interesting to know what happens if it goes nowhere in Q2. There are also lessons for the bulls here. Buying a dodgy stock on a big fall, as many did after the February profit warning, simply because it has fallen a lot, may work out short-term, but it is worth bearing in mind that bad news more often than not gets worse (profit warnings are like London buses as they say: they come in threes) – and there is always a real danger of waking up to the massive decline as many have now done. I have not shorted Plus but its brand is looking increasingly toxic and I will look to do so on any sustained bounce.
One stock I would sell right now is Purplebricks (PURP). On top of a business model that doesn’t work, Neil Woodford - whose funds owned 29% - has now revealed himself as a seller as he tries to shore up his foundering empire. Short of Axel Springer throwing good money after bad and buying the company (a disastrous move but stranger things have happened at the height of bull markets), the company is, in my view, doomed.
Filed under: Plus500, Purplebricks, Winnileaks, Management Resource Solutions, Versarien, Ashmore, Tex, share tip
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