If all this market volatility is making you sick, I’ve an idea you should like today.
Here’s a company that just thrives on volatility. I’m betting that it’s going to turn in a blistering year of growth – and that could make you a great return.
The UK’s oldest spread betting firm, IG Index, released its first quarter results yesterday and they were mouth-watering. Take a look at this.
Revenues surge as traders rush to cash in on volatility
IG’s revenues were up by 26% on the same period of last financial year – thanks to people’s hunger to trade in these tricky times. It’s benefiting from an end to “boring” market conditions earlier in the year, says chief executive, Tim Howkins.
As markets bounce around, traders use IG’s platform to make trades normal stock brokers can’t do.
First off, spread betting makes it dead easy to go short, ie bet on falling prices. At the click of a mouse, investors can short anything from shares, industry sectors, commodities, currencies or indices all over the globe.
We’ve already used a short here at The Right Side to profit from the crashing UK bank sector. We could have further shorting opportunities in the future – I’ll let you know.
But it’s not just shorting that makes spread betting a trader’s tool of choice in volatile markets.
In volatile markets, traders look to get in and out of their trades quickly. Spread bets are ideal. There’s no commission to pay on your trade (just the spread), which means trading costs are held down, and gains are tax-free.
And IG’s trading platform is excellent. I use it all the time. Traditional stockbrokers don’t offer anything like the tools you can get from these guys. That’s why spread betting is so popular at times like this.
But here’s where volatility really helps IG’s business.
Bad news for traders is great news for IG
Most spread betters take advantage of leverage. They put down a small deposit to get a large exposure. And to try to avoid losing too much, they use stop losses to get out if the markets move against them.
I’ve warned you about the dangers of stop losses before. Badly placed stops are sure to get hit – especially in volatile markets. You can place the best trade in the world, but with a badly placed stop loss, you can easily get knocked out as the market goes the wrong way – even if it is just for a few seconds.
The market has an uncanny way of reaching down, grabbing badly placed stops and then moving back up to where it should be. Bad news for inexperienced punters – but great news for IG, which reaps the rewards!
And this is showing through in IG’s growth figures.
How IG is growing fast around the world
IG’s Australian and European operations saw revenue grow by more than 50%. And in the rest of the world (incorporating US, Singapore and South Africa), it was nearly 80%!
That’s blistering growth as it sets up shop all over the world. And it’s been spending serious money on IT platforms as part of the expansion plans. This year will be no different. Growth, growth, growth. That’s what it’s all about.
So what should you pay for such a high growth business? Well, with the stock market trading on around ten times earnings, I would have thought we’d need to pay maybe 15 times earnings.
But IG trades at just 11 times 2012 forecast earnings. That looks great value to me – especially when you can pick up a yield of 4.5% while you own this stock.
I tipped IG last November at around 470p. Since then, it’s moved down, roughly in line with the market. At 440p, they’re down 5.5% versus -6.6% on the FTSE All-Share.
Source: Digital Look
IG Group five-year performance: 2006 +67.44% | 2007 +39.41% | 2008 -36.73% | 2009 +48.21% | 2010 +34.28% | 2011 (to 13 September) -11.17%
That doesn’t seem right to me. This is a business that’s not only growing during these tough times, it’s positively thriving. In my opinion, a stock like that should be outperforming the market much better. I think it will in time.
Obviously, there are risks. Any business that’s expanding rapidly into new markets can find that things go wrong. Local regulations can hinder the business – especially one like IG that’s involved in financial markets.
Operationally too, you may find that local markets aren’t quite as easy to navigate.
But I like IG. It’s paying me a 4.5% dividend – and that dividend is twice covered, meaning IG could afford to pay it twice over from its earnings.
That’s very attractive, especially when you’re looking at a stock with great growth potential. I’m not surprised analysts have increased their targets, with Singer Capital looking for 540p and Numis valuing it at 616p. On a 12-month basis, that doesn’t look stretched to me.
Action to take: Buy IG Group (LSE: IGG) at £4.50.
Ticker: LSE: IGG
Currency: UK pounds
52-week high: 553p
52-week low: 393.60p
Market cap: £1,593.12m
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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