Rising equity valuations, rising coronavirus cases and rising inflation rates are all reasons why analysts believe a market crash could be on the horizon.
I’m inclined to believe these projections. Some parts of the market appear incredibly overvalued. Inflation rates are also rising around the world. Historically, rising inflation has been bad for equities.
A market crash may — or may not — occur in the next few months, but we have seen volatility in recent weeks.
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As such, rather than getting out of the market altogether, I’d take a different approach. I’d buy a company that will profit in both scenarios. And I think I’ve found just the right business.
Stock market crash protection
In periods of elevated market volatility, investors tend to trade more. That can be good news for financial services firms which specialise in trading. That’s why I’d buy derivatives broker Plus500 (LSE: PLUS) to protect against a market crash.
The company’s results for 2020 provide some guide as to how the business might perform in a volatile environment. For the year ended 31 December 2020, Plus500’s total revenue increased 146% to $873m. Revenues jumped, thanks to what management described as an “unprecedented” level of customer platform usage. Overall, during the year, customers placed 82m trades on the firm’s platforms. In 2019, the number was 35m.
This record level of activity and revenues has provided the group with a capital infusion. It’s using some of the cash to invest in marketing its products while plotting expansion overseas.
A few days ago, the group completed the acquisition of US firms Cunningham Commodities and Cunningham Trading Systems. The former is a futures commission merchant and the latter is a futures and options trading platform provider.
The London-listed group paid $30m for this addition, and management continues to look for “additional bolt-on acquisitions.“
Risks ahead
Of course, past performance should never be used as a guide to future potential. Just because Plus500 performed well last year doesn’t mean it’ll do so in the next market crash.
Stock markets benefitted last year from government stimulus plans and quantitative easing. It’s not possible to say if they’ll step in again to stabilise the markets next time around. If they don’t, clients could run into financial difficulties, forcing losses on Plus500.
Despite these risks, I’d buy the company for my portfolio today, due to its performance in the last stock market crash.
A dividend yield of 8% and management’s commitment to return at least 50% of net profits to shareholders is also appealing. Management is looking at buybacks and dividends, with at least 50% of cash returns earmarked for dividends.
I think these comments suggest Plus500 could be an attractive income and growth stock for me to own.
