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Is this battered small-cap stock now a canny contrarian buy?

The introduction of new regulations by the European Securities and Markets Authority (ESMA) coupled with a lack of market volatility has led to shares in online trading platform CMC Markets (LSE: CMCX) being under the cosh for quite a while now.

Go back three years and the stock commanded a price of around 270p a pop. Before this morning, the very same shares traded at 96p. That said, today’s first-quarter trading update from the small-cap suggests a recovery might finally be in sight.

As a result of the firm generating higher revenue per client and more business-to-business revenue from institutions, net operating income over the three months to the end of June was better than over the same period in 2018. According to CEO Peter Cruddas, trading activity in the company’s CFD and spread betting business “has now stabilised“, giving hope to existing holders that the worst might be over.

Although costs are expected to be slightly higher in the current year, CMC also stated that it was confident of hitting its full-year guidance on pre-tax profit.

After initially soaring, CMC’s shares were up a couple of percent by lunchtime, leaving the shares on a valuation of 13 times expected earnings and yielding 4.3% (assuming analysts are correct in estimating the company will return 4.2p per share to holders in the current financial year).

With the company keen to diversify its earnings and capitalise on its recent partnership with Australia and New Zealand Banking Group (aka ANZ), I think this could be a fair price for patient investors to pay.

Industry leader

Of course, CMC Markets isn’t the only option available to prospective investors in this space. Although there’s clearly an element of bias here (I’m already a holder of the stock), I think IG Group (LSE: IGG) — the oldest and largest player in the field — makes for an even better buy.

That’s not to say the FTSE 250 member has been immune to the problems faced by CMC. Earlier this week, the company revealed that net trading revenue had fallen 16% to £476.9m over FY19 as a result of the aforementioned increase in regulation and “less favourable” market conditions. Operating profit of £192.9m was a full 31% reduction on that achieved in the previous year. Nevertheless, I continue to think there are grounds for optimism.

IG continues to attract new clients, with 31,310 making their first trade over the 12 months to the end of May. When market volatility returns as a result of concerns over the growing possibility of a no-deal Brexit, slowing global growth or some ‘unknown unknown’, I can only see this number rising.

A likely 43.2p per share dividend for FY20 also makes IG the higher-yielding share of the two (at 7.5%), even if management has stated its intention to maintain rather than grow this payout until earnings get back on track.

This might not take that long. The company already believes it will return to revenue growth in FY20, helped in part by its two new businesses in the US and the EU. Importantly, the latter, based in Germany, ensures that IG can continue operating in all member states regardless of whether the UK crashes or saunters out of the EU in October.

On a forward price-to-earnings (P/E) ratio of a little under 14, I remain a buyer at these levels.

Proven Pedigree

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Paul Summers owns shares in IG Group. 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.