Recently the markets have been strong and generally have been heading in an upwards direction, which has been great news for many investors holding shares in larger FTSE companies. Not everyone has benefitted from this though, and in particular companies that offer CFDs and spreadbets haven’t been performing as well, and are actually craving some higher volatility to return to the markets as it is during those periods when they tend to perform best. Given everything that is going on in the world at the moment though, including an end to tapering; talk of interest rate rises and potential inflation problems; bond yields rising; the threat of Covid re-emerging in the West this winter and causing further issues; not to mention shares in some countries such as the US trading at crazy multiples, then I find it hard to believe that we won’t see greatly increased volatility during the latter part of this year and into 2022.
CMC Markets (CMCX) has just taken a big hit to its share price following a disappointing trading update for the five months up to the end of August, and that caused a drop from around 420p to the current price of circa 290p. Even prior to that news, the market must have had some doubts as the SP had been drifting since early April when the shares were trading at close to 550p. The main negative in the update was that 2022 full year net operating income was now expected to be significantly lower than that stated in the Q1 trading update to the end of June, which had noted the drop in client trading activity but was still predicting an operating income in excess of £330 million. The continued lack of volatility and lower trading activity amongst both existing and newly acquired clients since that update has caused the company to revise its estimates downwards to £250-280 million for the year, but does also mention that is based on the assumption that current market conditions will prevail. So if we do see volatility return, and as a result of that higher levels of trading activity during the remainder of the year, then it wouldn’t surprise me to see CMC achieve the upper end of the new guidance, or even exceed it.
Prior to this blip in income the company had been performing very strongly, and has benefitted from a significant number of new clients, as compared to pre-pandemic levels, and so far it looks like it is managing to retain them and that their accounts are still remaining active, even following the end of furlough and a general return to work. This is supported by the fact that AuM (assets under management) continue to be at record levels. Net operating income for 2022 isn’t going to compare favourably with the £410 million recorded for the previous year, which saw it make a pre-tax profit of £224 million. Until we see the interims it is hard to gauge exactly how much profit can be expected this year, but going by past figures, I’d still expect a profit of circa £100 million even if it only achieves the lower end of guidance. That would likely result in earnings per share of around 30p, and suggests to me that the current share price is too low as it would be trading on a multiple of below 10x. Again, this is only guesswork, but I’d like to think a dividend of around 15p would be paid for the year, based on my profit expectations (and the company policy to pay out 50% of post-tax profit as a dividend each year), and if that was the case, then it would be a very handy yield of in excess of 5%.
Obviously a lot of guesswork is involved here until we get the actual figures on profit and the like, but I can see enough to pique my interest at the current market cap of around £844 million, and to make me think that the drop on this FTSE250 company has been overdone – quite likely the fact that it isn’t the most liquid stock, as Peter Cruddas owns 56.7% of the company, along with several II holders having positions around the 5% level, also played a part in how hard it fell when the trading update came. I can see enough recovery potential here to have bought some myself, with an initial target of somewhere around the 330-340p level for a trade, at which point - and assuming it actually bounces back of course! - I will reassess my position and decide whether to bank it or to take a longer term view on all or part of it, depending on how the markets are looking at the time. Buying stocks that have seen a big drop isn’t always a good strategy, as often there is good reason for that drop, but the flipside of that is that often the initial drop after news is overdone, and even the very large FTSE companies can sometimes see a decent bounce once they’ve settled down, and I think there is a good chance that CMC will do that.
Filed under: CMC Markets, Chris Cleverly, easyJet, Salt Lake Potash, TP Group, Cineworld
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