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Is IG Group Holdings plc a contrarian buy after profits rise by 7.8%?

Pre-tax profits rose by 6.7% to £105.2m at spread betting firm IG Group Holdings (LSE: IGG) during the six months to 30 November. The group’s earnings per share rose by 7.8 to 22.55p, while new client numbers were ahead of the prior year by 59%.

The firm also announced a number of measures aimed at addressing UK regulatory plans to limit the amount of leverage available to retail investors. IG will reduce the range of binary options available to new clients and accelerate the rollout of its Limited Risk account, which prevents clients from losing more than their deposit.

IG rightly sees itself as a cut above some of the overseas-based firms which compete in this sector. The group was keen to emphasise its sophistication today, flagging up the ongoing expansion of its stockbroking service and a move into discretionary investment management.

The firm said that in the medium term, regulatory restrictions to protect inexperienced investors often lead to improved client outcomes and benefits for compliant providers. However, this doesn’t mean that the group won’t be affected by the FCA’s planned new restrictions.

These planned changes are still under discussion and aren’t expected to impact IG’s results this year. For now, this means that the shares trading on a forecast P/E of 11.5 and offer a prospective yield of 6%.

If you believe that this well-run company will continue to survive and adapt — as it has done before — then now could be a good time to buy. I’d rate the shares as a cautious buy.

A true contrarian pick?

If you’re looking for contrarian opportunities in the financial sector, then Barclays (LSE: BARC) may be worth considering. The firm’s shares have risen by 50% over the last six months, but still trade at a 20% discount to their net tangible asset value of 287p per share.

Barclays’ recovery has been long delayed and the bank is still rebuilding its balance sheet. However, it did pass the 2016 Bank of England stress tests. These measured whether UK banks would be able to cope with the losses arising from a 4.3% fall in UK GDP, unemployment of 9.5%, a 31% fall in the housing market and a major collapse in the oil market.

These events aren’t impossible. But they’re fairly unlikely. The fact that UK banks including Barclays can now pass these tests seems impressive to me. It also suggests they should be able to deliver increased profits in more ordinary conditions.

The City also seems to be coming round to this way of thinking. The consensus view from City brokers is that Barclays’ 2016 results will be a significant improvement on recent years.

Adjusted earnings are expected to have risen to 13.1p per share in 2016. A 55% increase to 20p per share is pencilled-in for 2017, putting the stock on a very reasonable P/E of 11. No dividend increase is expected just yet, leaving Barclays stock with a yield of just 1.3%. But if trading does return to normal, dividend growth should follow.

As a shareholder myself, I plan to continue holding in 2017. At current levels, I think Barclays could also be a profitable buy.

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IG and Barclays could both deliver gains from current levels. But both stocks carry risks, in my view. If you're looking for reliable long-term income buys, I think there may be better picks elsewhere.

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Roland Head owns shares of Barclays. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.