With a price-to-earnings ratio under 10 times and its safely-covered dividend yielding a full 5.5%, I’d expect embattled contract for difference trader CMC Markets (LSE: CMCX) to be popping up on many value investing screens these days. But is this CFD specialist a wise bet for investors as regulators target the industry?
Well, CMC management certainly appears to see the writing on the wall as regards the stricter margin limits, higher levels of client due diligence and restrictions on marketing its products to new traders/gamblers that regulators in the UK and EU are moving towards implementing.
The firm is responding to these likely moves by increasing its focus on long-term clients who can be termed ‘professional’ by regulatory standards, seeking to expand into less risky areas such as traditional stockbroking, and pushing into less regulated territories such as the Asia Pacific region.
The group’s Q3 trading update released this morning shows this is proceeding, with the number of active clients down 6% year-on-year while revenue per client increased a full 33% due to higher activity from big-spending ‘high-value clients’.
Yet while this increased shift towards high-rollers may lessen the impact of any proposed regulations on CMC’s ability to attract new customers, I still see plenty of reason to worry about the coming crackdown on the sector.
In H1, CFD and spread betting accounted for a full 94% of the group’s operating income, with the highly vulnerable UK and European markets providing a full 70% of net revenue from these products. This is largely why analysts are predicting a consensus 13% drop in earnings for CMC in fiscal year 2019, when any new regulations would begin to go into force.
While CMC does offer a very nice dividend and appears to be better positioned for the coming regulations than some rivals who are still attached to the old ‘churn and burn’ CFD business model, the uncertainty over the full scope of these regulations simply creates too much risk for me to be comfortable holding the stock right now.
A diamond in the rough?
That’s not to say I’m risk-averse, because the contrarian in me is becoming interested in electronics retailer Dixons Carphone (LSE: DC). The group was forced into a costly profit warning in August as slowing demand for smartphones on expensive contracts, and the weak pound, led management to drastically curtail full-year profit guidance.
However, I don’t think it’s all doom and gloom for Dixons from here. The firm only has to look across the Atlantic to the success of Best Buy to see that the electronics it sells can weather the storm of e-commerce as many consumers still like to go in and try out these big-ticket items before buying.
Indeed, over the Christmas period this proved to be the case as the group offered up 6% like-for-like sales growth across all its regions, with the UK up 3% on its own. Although the new iPhone X may have provided a one-time bump to this performance, I still think Dixon’s low debt levels, rising market share, safely-covered 5.5% dividend yield and 9.8 P/E ratio make the company one interesting option for contrarian income investors.
