Over the past week, stock markets around the world have jumped as the spill over from the US election result is felt. The FTSE 250 index is up 8% so far this year, with some individual constituents up significantly more. Yet there’s one stock that I feel I’ve missed the boat on which I have on my watchlist if we get a significant correction.
Incredible gains
I’m referring to CMC Markets (LSE:CMCX). The financial trading and investing platform has risen by a whopping 232% over the past year. The growth has been at a frantic pace, but the stock is currently too high for me to justify buying. Even from a valuation perspective, it looks stretched. For example, the price-to-earnings ratio stands at 19.34, almost double the fair value benchmark of 10 that I use.
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Yet even though I’m not buying right now, any kind of sharp correction would see me step in. One of the main reasons why I like the stock is due to the way it makes money. CMC generates fees from trading activities. Put another way, the more that users buy and sell different assets, the more money it makes. So ideally, CMC wants to see volatile markets, enabling more opportunities for clients to trade and invest.
Over the coming year, I think we’ll see such volatile markets. This relates to the start of the Trump presidency, a likely election in Q1 in Germany, persistent economic problems here in the UK and much more. I haven’t even started to talk about the surge in interest being seen in crypto (which CMC offers)!
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A potential market wobble
Some of this volatility might result in a stock market crash, which serves my purpose well in hopefully being able to buy the stock cheaper than current. I think that we could see a crash based on a couple of catalysts.
One is the potential for escalating trade wars from the US and China. This could spook investors and cause stocks to tumble lower.
Alternatively, it could be triggered by continued escalation in the Middle East. Given the impact this would likely have on oil, gold and other assets, stocks related to these commodities could be in for a rough ride.
Weighing it up
There are some risks to my view. One is that we might never see the CMC share price tumble. So if I’m correct and the business does well and generates higher profits from client activity, I could miss the boat completely.
Another risk relates to the business. In a recent update, it spoke about how it’s planning to offer more products, including Cash ISAs in the UK. I’m not sure that this is a good idea, as there are plenty of existing providers of ISAs. I don’t think CMC has a unique selling point in this area. As it continues to grow, it needs to select where it wants to focus on wisely.
Even with those risks, it’s definitely a stock I’m keeping on my watchlist.
