Why I’m Avoiding Royal Bank of Scotland Group plc & Plus500 Ltd For 2016

At this time of year, we have a pretty good idea of the annual outturn for most companies whose financial years coincide with the calendar year. As such, attention increasingly shifts from 2015’s numbers to the prospects for 2016.

Royal Bank of Scotland (LSE: RBS) and Plus500 (LSE: PLUS) are two stocks that I don’t have great hopes for in the year ahead. Let me explain why I’m steering clear of the FTSE 100 bank and the AIM-listed spread-betting firm.

Royal Bank of Scotland

I see RBS as not unlike Jacob Marley in A Christmas Carol: “captive, bound and double-ironed”, dragging a chain of “cash-boxes, keys, padlocks, ledgers, deeds, and heavy purses wrought in steel”, as punishment for past avarice and iniquity.

Just as Marley was in this state seven years after his death, so RBS remains, seven years on from the financial crisis, when death was only averted by a £45bn government bailout.

RBS has been given a second chance, but it’ll be a good few years yet before the bank is unfettered from the heavy drag of bailout, restructuring costs, and fines and compensation. Progress is being made, but I don’t see a big upsurge in demand for the shares coming in 2016 — even though they’re currently trading at a 52-week low of around 300p.

Since the financial crisis, the City consensus has been persistently over-optimistic about RBS’s earnings recovery and resumption of dividends. The current earnings consensus for 2016 is 22.25p, giving a price-to-earnings (P/E) ratio of 13.5x, which is already high relative to RBS’s peers; and it could be higher still if the consensus once again proves to be too rosy. There appear to be better prospects in the banking sector for 2016, so I’m avoiding RBS for the time being.

Plus500

Plus500 operates an online trading platform for retail speculators to bet on the movements of shares, ETFs, currencies, indices and commodities. This Israel-domiciled company listed on AIM in July 2013 and has never “smelled” quite right to me.

I’m always wary of companies with supersonic revenue and earnings growth, great margins, and so on — companies that seem almost too good to be true when compared with more humdrum peers. Plus500’s directors put the success of the business down to “self-developed, proprietary technology”, but information in the company’s Admission Document (the prospectus that all AIM companies must publish), offered a possible alternative explanation.

Plus500 appeared to have a history of serial failings, with fines and warnings for a litany of things, including — but by no means limited to — “regulatory failures relating to transaction reporting”, “lack of risk warnings”, “certain financial promotions”, and commencing trading in some jurisdictions, “where operations have been found to constitute, or are likely to constitute, an offence”.

Playing fast and free with laws, regulations and the treatment of customers is one way to get ahead in the short term, but doesn’t bode well for a sustainable business. This year, Plus500 got hit again when the company’s anti-money-laundering systems and procedures were found wanting.

Since then, we’ve seen Plus500 agree to be taken over (in “shareholders’ best interests”) by Playtech, only for the deal to collapse this week after Playtech found itself unable to satisfy “certain concerns” raised by the Financial Conduct Authority by the requisite date for the transaction to complete. Plus500’s directors immediately released a bullish statement on recent trading, and on the bright prospects for Plus500 as an independent company.

For me, there seems to be an ingrained cavalier culture at Plus500, intent on sucking in cash with avoidance of, or minimal compliance with, rules, regulations and general ethics. It’s impossible to put an accurate valuation on such a business, so I’m avoiding the stock — at least until such time as there’s evidence of a sea-change in the company’s culture.