Undervalued stocks can be a great source of potential profits for an investor. If I can buy the shares when the company has a beaten down share price, in the long term, the price should rise back to its fair level. For example, FTSE 250 stock CMC Markets (LSE:CMCX) dropped 35% last year. Here’s why I think it’s an undervalued stock to buy.
Growth during the pandemic
CMC is one of the top players in the UK in the retail trading space. The online platform allows users to buy and sell a variety of financial instruments, including stocks, currencies and commodities. This can be done in several different ways, including contracts-for-difference (CFDs). These allow me to speculate on whether a stock or currency will do up or down. It involves leverage, meaning I could invest more money than I have in my account by borrowing the rest. This means that my gains or losses are increased.
The business has been around for several decades, but went public in 2016. It really started to gain traction in early 2020, when retail trading exploded. The volatility that was thrown up by the pandemic meant that there was more potential to make money from leveraged trading. This wasn’t just on stocks, but on assets such as gold and the US dollar.
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This led to higher revenues and ultimately higher profits for 2020. The FTSE 250 stock saw share price gains during this period. Over a two-year period, CMC shares are up 73%.
Stalling during 2021
Coming into 2021, things looked great. However, the issue CMC found was that as markets quietened down, so did revenue. This was highlighted in the half-year results. Year-on-year, net operating income dropped by 45%. The bulk of this hit came from the risky-but-profitable leveraged trading, which was down by 50%. The more conventional non-leveraged division only had an 8% fall in income.
The business commented that this fall was “a result of a decrease in market volatility resulting in lower client trading activity and client income retention reverting towards guided levels”.
So it’s no surprise that the FTSE 250 stock saw its share price fall by the amount that it did over the course of the year.
A good value FTSE 250 stock
Personally, I think that CMC is a good buy at the moment. Firstly, I expect the next quarter to offer higher levels of volatility in financial markets. We’ve already started to note this in December. Interest rate hikes and the rise of Omicron saw stock markets get very jittery. I don’t think this is the end of the volatility by any means, especially if we get further restrictions in the UK that impact the economic outlook.
Secondly, I think the share has been oversold, as investors expected too much growth. 2020 was an outlier year. But when I look at the half-year results for 2021 compared to 2019, the business is still ahead. For example, net operating income is up 24% versus 2019. I think that the current share price doesn’t fully acknowledge this.
Clearly, there are still risks here. A lack of volatility is a concern I have. Further, regulators are protective of retail investors, so any tightening of rules in the future could restrict the CMC product offering.
Yet even with the risks, I’m considering buying CMC shares now as a top FTSE 250 stock for 2022.
