Today I want to talk about a company I see as an ideal share to buy for my portfolio. In my view, owning shares in this business should help to reduce the impact on my investments of a stock market crash.
Of course, I don’t know when the next crash will be. But high commodity prices, global supply chain problems, and rising labour costs are all putting pressure on corporate profits. I think there’s a real risk we’ll see share prices fall sharply before Christmas.
The perfect insurance policy?
The company I’m talking about is online financial trading firm CMC Markets (LSE: CMCX). This business offers spread betting and contracts for difference on popular stock market indexes, individual shares, and commodities.
I see this stock as a kind of insurance policy. When markets are volatile, like they were last year, CMC’s clients find plenty of trading opportunities. That causes profits to surge — CMC’s earnings doubled last year.
If the market stays calm, then CMC’s profits will be lower. However, the company’s past results suggest to me that even in dull markets, it’s a very profitable business. Historically, profit margins have averaged about 30% — last year CMC’s operating margin hit 55%.
In my opinion, this business should be a fairly safe share to buy at current levels. But of course, there are some risks, as we saw two weeks ago.
CMC share price crash: trouble ahead??
If you’re a market watcher, then you’ll probably have noticed that CMC’s share price crashed on 2 September. The company said that calmer market conditions in July and August meant that revenue would be lower than expected this year.
This will have a knock-on effect on profits, which are now expected to fall sharply this year.
However, unless any other problems emerge, I think the shares have probably fallen too far. CMC’s active client numbers are still around 30% higher than they were before the pandemic. The company says these traders still have near-record levels of funds in place, suggesting they’re simply waiting for better conditions to trade.
Broker profit forecasts for this year have been cut by around 25%. But CMC’s pre-tax profit is still expected to be higher than it was in the 2019/20 financial year, which included the early part of last year’s market crash, in February and March.
A share to buy now?
One element of the CMC Markets story I’ve not mentioned is its growth strategy. The company’s leveraged trading business (using borrowed money to bet on price movements) generates most of its profit.
However, CMC is also expanding into the less risky business of stockbroking. The company generated 13% of its revenue from handling share trades last year and has nearly 250,000 share dealing clients.
I expect this business to keep growing. I’m also encouraged by the stability of management here. CMC chief executive Lord Cruddas is the company’s founder and still owns more than 50% of its shares. His interests should be well aligned with those of shareholders.
CMC now trades on 10 times forecast earnings and offers a 4.5% dividend yield. That looks cheap to me. I see CMC as a good share to buy at the moment. I would be happy to add the stock to my portfolio today.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.