Shares in online trading platform Plus500(LSE: PLUS) are on the back foot once again this morning after regulators issued a damning report against the contracts for difference and spread betting industry.
Before the market opened, the Financial Conduct Authority announced that it had discovered "areas of serious concern" within the CFD market after reviewing the operations of 34 spread betting firms over a 12-month period.
The FCA said it had found in its review -- conducted from July 2015 to June 2016 -- that 76% of retail customers who bought CFD products lost money over the period. It also discovered severe operational issues at some companies including "weaknesses in the conflict of interest management arrangements." One firm's practices are reportedly so bad that the FCA is planning to take further action against the business.
After evaluating all of the data collected, the FCA has concluded there is "a high risk that firms across the sector are not meeting our rules and expectations when providing and distributing CFDs." As a result, the regulator believes "consumers may be at serious risk of harm from poor practices in this sector."
There has been no direct action against CFD and spread betting companies announced today, but the FCA said it had sent a letter to all providers and distributors of these products to retail customers to ensure they "pay due regard to the interests of customers and treat them fairly." It is also now conducting a public consultation on the matter.
Beating the market
This is just the latest attack against companies like Plus500. Over the past 12 months, regulators have ratcheted up the pressure against CFD providers, which they believe offer a poor proposition for inexperienced retail investors.
However, the possible clampdown has only had a positive impact on Plus500's shares. They're up 180% over the past 12 months excluding dividends. Shares in peers IG Group and CMC Markets have gained only 41% and 21% respectively over the same period.
Plus500 has been able to outperform because customers are still flocking to its offering. For the third quarter, revenues jumped 50% thanks to a 69% rise in new customers signing up to the site for the first time and a near 50% drop in the cost of acquiring customers. Following this robust performance, City analysts now expect the firm to report a 54% increase in earnings per share for the full year. At the time of writing, this projected growth means that the shares are trading at a forward P/E of 9.5 and support a dividend yield of 6.2% -- a highly attractive valuation.
But is this yield worth buying?
Time to buy?
Plus500 might have outperformed over the past 12 months, but with regulators circling, it's impossible to predict how the firm will fare over the next year. Any action from the FCA is almost certain to hit growth although the timing of such action, and its impact, is not possible to estimate right now.
So overall, despite Plus500's rapid growth, attractive valuation, and market-beating dividend yield, I'd avoid the company. There are other companies out there that offer similar attractive qualities with no regulatory risk.
Attractive qualities with no regulatory risk
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Rupert Hargreaves owns no share mentioned. 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.