Shares of FTSE 250 online trading firm IG Group Holdings (LSE: IGG) fell by as much as 11% this morning. The fall was triggered by a statement from the European Securities and Markets Authority (ESMA), detailing tough plans to introduce leverage limits for retail clients.
IG offers spread betting and contracts for difference (CFD). These allow investors to trade contracts such as the FTSE 100 and exchange rates with only a small ‘margin’ payment. This is often less than 1% of the value of the underlying derivatives contracts.
The concern among regulators is that retail traders don’t always understand the size of the losses they may face.
What’s changed?
In December 2016, UK regulator the FCA announced plans for restrictions on leverage for retail clients. This caused a major share price crash for IG and its sector rivals. Strong recent trading meant that the shares had largely recovered before today, but the ESMA proposals are tougher than those from the FCA.
ESMA is suggesting a ban on certain binary products and leverage limits of between five and 30 times, compared to the FCA’s suggestion of 25 to 50 times. So the potential impact could be greater than expected.
A buying opportunity?
IG Group is the market leader in this sector in the UK. So it would be my choice as a potential recovery buy, following today’s fall.
In a statement issued today, the company says it is taking steps to reclassify as many of its investors as possible as professional, rather than retail investors. Professionals aren’t expected to be subject to the same restrictions and IG believes half of its clients, in terms of revenue, could qualify as professional.
The firm says the potential impact is “difficult to predict” but believes the impact of the ESMA plans on historic revenue would have been “less than 10%”. What the firm doesn’t say is how much of an effect this would have on the firm’s historic profits.
However, it is already taking steps to diversify and restrict the sales of riskier products. After today’s fall, the shares trade on a forecast P/E of 14 and a prospective yield of 5.1%. Given the group’s strong balance sheet and market-leading position, I’d rate the stock as a buy.
One Woodford stock I’d consider
Retail-focused property group NewRiver REIT (LSE: NRR) has seen the value of its stock fall over the autumn. But the shares rebounded sharply after recent half-year results were released, suggesting the sell-off may have gone too far.
The Neil Woodford-backed firm said that funds from operations rose by 8% to £26.5m during H1. Occupancy remains high at 97%, and like-for-like rental income rose by 0.9%, excluding losses resulting from the BHS administration. Including the impact of this setback, like-for-like rents fell by 0.4%, which seems acceptable to me.
The group has recently completed a refinancing and fundraising which should reduce debt costs and provide cash for growth. Loan-to-value is just 25% and the company says it will remain below 40% as fresh cash is deployed.
‘Under the radar’ income?
For shareholders, NewRiver stock offers an attractive forward yield of 6.2%.
Although the stock does trade at a 15% premium to its book value of 297p — reducing downside protection — I believe it remains worth considering as an income buy.
