There’s an old saying that investors who want to make the most of a gold rush should invest in pickaxes and shovels. So should investors put their money into the companies who make money every time we trade?
The companies I’ll cover here include the FTSE-listed giants who run funds and manage many billions in UK investor money every year in SIPPs and Stocks and Shares ISAs.
Running a slightly different business to the two below, IG Group (LSE:IGG) is a FTSE 250 spread-betting firm. If you want to short a stock, that is, to bet on a share price to go down rather than up, IG Group handles that by selling financial instruments called Contracts for Difference (CFDs).
With a tasty-looking 6.3% dividend and trading at a price-to-earnings ratio of 15, IG represents an interesting prospect.
However, trading results for the first half of 2020, out on 21 January, should give you some pause.
Net trading revenues were flat from 2018 to 2019 (£249m compared to £251m) and IGG is struggling to deal with much stricter rules on the marketing and sale of CFDs first brought in by European regulators and made permanent by the Financial Conduct Authority in July 2019.
Chief executive June Felix focused on the fact that Japanese revenue grew 82% from £8.9m to £16.2m across the period. However, Japan makes up just 6% of total revenue. The vast majority of its customers are in the UK and EU, where revenue fell from £109.8m to £97.9m and from £38.6m to £33.4m, respectively.
Future growth prospects, then, are a cause for concern.
Manchester-based AJ Bell (LSE:AJB) went public on the FTSE 250 at 160p in December 2018 and reported a year later it had 230,000 clients with £52.3bn assets under administration (AUA) for its customers.
AJ Bell’s share price is 150% higher than at its IPO, adding 40% in the last 12 months alone, making it an attractive growth prospect.
Today’s price around 400p gives it a headline P/E ratio of 53; well out of the range of most value investors. I would want to see the share price pull back before putting any money down.
Storied London trading platform Hargreaves Lansdown (LSE:HL) has built up a seemingly unassailable lead as the UK’s leading broker-dealer. As of September 2019 it had over £100bn AUA. Its £11.95 trading fees put off some newer investors and more recent debutants like Freetrade offer zero fees, but I would wager a good proportion of those reading this article will have their Stocks and Shares ISA with HL.
The firm’s reputation was somewhat tarnished by the scandal around disgraced fund manager Neil Woodford, whose funds remained on HL’s star-rated recommended lists even as they approached collapse through 2019.
However, it still offers the widest choice of stocks, funds, and ETFs to invest in and has the most sound fundamentals of the brokers on this list: revenues and profits have climbed steadily since 2014. £199m pre-tax profits on £395m revenue five years ago turned into profits of £305m on £480m revenue in 2019.
A forward P/E ratio of 31 takes into account its growing earnings per share and soaring sales. City analysts expect the dividend to rise 37% in the next year, from 34p to 46p per share. For the very long-term investor, there really is only one choice in my mind.
Tom Rodgers has no position in the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.