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Is this small-cap stock a screaming bargain or value trap after tanking over 40%?

It’s fair to say that the three listed spread-betting companies probably won’t be sorry to see the back of 2018. Low volatility in the stock market (until recently), combined with increased regulation, has hit profits hard, prompting investors to move their money elsewhere.

Having peaked at the start of August, shares in market leader and FTSE 250 member IG Index have now fallen almost 35%. While staging a brief comeback over the last few weeks, rival Plus 500‘s stock is still 30% down.

CMC Markets (LSE: CMCX) — the smallest of the three — hasn’t had an easy ride, either. Having breached 200p back in June, the stock has now fallen over 40% in value. Based on the reaction to today’s interim results, a recovery could still be some way off.

Tough times

Despite a 14% rise in the number of trades being made with the company (to a little under 35m), net operating income fell 21% to £70.6m in the six months to the end of September. As expected, a “particularly difficult” second quarter was, according to the company, the result of “a sustained period of low market volatility and range bound markets,” not to mention the regulatory changes introduced in Europe at the beginning of August. Pre-tax profit plunged 76% to £7.2m.

To make matters worse, CMC also saw a slight reduction in its popularity among traders. The total numbers of active clients — defined as those who have traded with the company at least once over the six-month period — fell 4% to just under 44,700. Once rebates and levies were accounted for, revenue per client tanked 22% to £1,413.

Considering how awful these numbers are, it’s perhaps not surprising to see the company take a knife to its dividend. At 1.35p per share (equivalent to half of the post-tax profit), today’s interim payout is 55% below the 2.98p per share cash return promised to shareholders this time last year. If this reduction were to be carried across to the full-year dividend, owners can expect roughly a return of 4.02p in the current financial year. That’s a yield of roughly 3.5% at today’s share price.  

Reasons to be cheerful?

After such a hammering from the market, the question arises as to whether CMC’s stock — trading on 12 times earnings before this morning — is now approaching bargain territory. While there can be no certainty over its direction in the very short term, I’m inclined to be optimistic.

The fact that trading volumes appear to have staged a recovery since August (and client deposits have “not changed materially“) suggests there’s light at the end of the tunnel. I’m also tempted to agree with CEO Peter Cruddas that reputable firms such as CMC will ultimately benefit from increased regulation, even though competition will clearly remain fierce.

Elsewhere, CMC’s strategy of diversifying its operations by making its stockbroking business a “more meaningful part” of the company, looks sound. The migration of 500,000 retail clients to its platform from ANZ Bank in September — a partnership that is predicted to generate roughly £7m in pre-tax profit for CMC on an annual basis — is a positive start.

Combine the above with news of plans to secure a new office in Dubai, an operating licence in South Africa, and a (post Brexit) regulated subsidiary in Germany, and CMC smacks of a cautious buy at current levels.  

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Paul Summers 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.