Each quarter, the FTSE indexes get reshuffled. FTSE 250 shares that have performed well and have a high market cap can get promoted to the main index, with underperformers dropping out. The next changeover will be in March, but one stock has already caught my eye and could do well for the rest of the year.
Riding the wave
I’m talking about IG Group (LSE:IGG). The financial services company has a market cap of £4.65bn, with some FTSE 100 peers having a market cap of £1bn less. This makes it likely to get the nod next month, providing nothing crazy happens in the next few weeks.
The rise in market cap has been driven by a 39% surge in the share price over the past year. Some 24% of that gain occurred in the past three months.
It has done well on the back of new customer account growth and higher client trading activity. This doesn’t surprise me, given the volatility we’ve seen in the stock market over the past year. Given that IG makes money from each transaction, the higher frequency of client trading is a good thing.
This has filtered down to both higher profits and raised guidance for the future. For example, back in late November, a trading update detailed that “the company is accelerating its guidance, now expecting to achieve revenue growth around the mid-point of its mid-to-high single-digit target in calendar year 2026”. It went further, saying it’s “confident in meeting market expectations for EBITDA”.
Continued growth potential
A promotion to the FTSE 100 could help the company further, as it brings a lot more eyeballs on the business. Further, FTSE 100 tracker funds would buy the stock. Even though FTSE 250 trackers would sell it, the net impact would be positive, as there’s more volume and interest in FTSE 100 trackers.
Beyond this potential bump, there are several reasons why I think the stock could do well further down the line. It has recently secured new product licenses in the UK and EU. This gives it a much broader scope to dive into new asset classes.
Another factor is the price-to-earnings ratio. At 12.11, it’s well below the FTSE 100 average of 18. This could make it undervalued, even with the recent price boost. Even if earnings per share don’t increase, the stock could rally before it looks overvalued.
No such thing as a free lunch
In terms of risks, there’s always a regulatory concern with some of the products offered. The use of leverage by retail investors can amplify losses, and tightening policies on the provision of such services could reduce revenue for IG.
Even with this, I think the stock looks attractive and could be considered by investors ahead of any potential inclusion to the FTSE 100.
