Lloyds shares have performed well recently. Over the last year, they’ve risen about 36%.
Yet that return looks rather pedestrian relative to the gains generated by a financial stock in the FTSE 250 index. With this stock, investors could have picked up another 20 percentage points or so.
A hot stock in the FTSE 250
The one I’m talking about is CMC Markets (LSE: CMCX). It’s a leading online trading and investment business.
Founded in 1989, it operates in 12 countries today. Services offered include stock and ETF trading (commission-free in many cases), FX trading, spread betting and contracts for difference (CFDs) trading, and white label solutions for other companies.
At present, CMC shares trade for £3.27. That means £1,000 buys around 305 shares (ignoring trading commissions).
The stock – which is up almost 60% over the last year – may not be at these levels for much longer though. I reckon it may only be a matter of time until investors spot the opportunity here.
The investment opportunity
Looking at the set-up, there’s a lot to like about CMC shares, in my view. For a start, the company is well placed to benefit from volatility in the stock market (which is picking up as a result of several factors).
When markets become volatile, investors and traders tend to place more trades. This translates to more revenue for the company (which takes a slice of every transaction through a spread between buy and sell prices).
Second, the company has recently done some white label deals that could massively boost growth. One such deal was with Aussie bank Westpac (one of the big four banks in Australia).
This is expected to increase the company’s user base significantly. And it should cement the company as the country’s second largest stockbroker.
I’ll point out that I’ve used the company’s investment platform in Australia and it’s really good. With commission-free trading on offer for Australian share trades under $1,000, and zero fees for US stock trades, it’s very cost effective.
Third, the valuation looks attractive. Currently, the forward-looking price-to-earnings (P/E) ratio is only 11.6.
That multiple looks too low to me. To my mind, there’s definitely scope for a valuation re-rating at some stage.
Finally, the company is hiking its dividend. In November, it lifted its H1 payout by a whopping 77% to 5.5p per share.
For the current financial year, analysts expect a payout of 14.7p per share. That puts the dividend yield at about 4.5%.
Worth a look?
Now, of course, there are risks here. One is competition.
Today, this area of financial services is intensively competitive. One rival to keep an eye on is Robinhood Markets (I just bought shares in this firm), which is having a huge amount of success at the moment.
Another risk is regulation. In the future, regulators could decide to clamp down on higher-risk products like CFDs.
Overall though, I see a lot of potential. I think this FTSE 250 stock warrants further research.
