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Why I still think this battered small-cap stock will bounce back

The Motley Fool logo The Motley Fool 6/6/2019 Paul Summers
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Neil Woodford isn’t the only one having a tricky time at the moment. Thanks to the introduction of new regulations regarding how much leverage clients are allowed to use and subdued market conditions, today’s final results from small-cap CFD and spread betting provider CMC Markets (LSE: CMCX) were never going to be pretty. 

Horrible numbers

Thanks to the aforementioned introduction of stricter conditions on accepting applications, there was a 10% reduction in the number of active clients and a 6% fall in the number of trades. The value of the latter was also 13% less than the previous year.

Perhaps unsurprisingly, this led to the company reporting a 30% decrease in the amount of revenue it has generated from each client to a little over £2,000.

All told, net operating income — total revenue after commissions — fell by 30% in the year to the end of March to just under £131m. Pre-tax profit tanked by a horrible 89% to £6.3m. 

Clearly, this has meant that CMC has needed to take action. 

Dividends have been slashed with the final payout of 0.68p per share giving a full-year cash return on 2.03p. That’s 77% down on the previous year. 

The company has also taken steps to diversify its revenue streams with CEO Peter Cruddas stating that the firm is “much more balanced today than it has ever been” thanks to growth in its stockbroking division and more institutional business.

Having been rolled out as planned, its partnership with ANZ Bank generated an 81% jump in stockbroking net revenue to £15.5m.

There were a couple of other encouraging developments. Professional client numbers “remain stable” and the company’s German subsidiary — set up to counter any fallout from Brexit — is due to be operational by October, assuming CMC receives final approval from the regulators.  

Volatile stock

Despite falling 12% as trading commenced this morning, CMC’s shares are now up over 1%, highlighting just how volatile small-caps can be and more specifically, how conflicted investors are on the company’s future. 

Personally, I remain optimistic on CMC recovering in time for a couple of reasons aside from its push to become more diversified.

First, the current subdued market conditions will inevitably change. This could be due to further conflict on trade between China and the US, the growing possibility of a no-deal Brexit or an event that we simply can’t foresee. When this happens, more clients will become active and revenues at CMC should rise accordingly.

The fact that the CEO still owns a massive amount of shares also gives me confidence.

While nothing can be guaranteed, managers with sufficient ‘skin in the game’ will always be more incentivised to succeed than those who run companies just for a salary, at least in my opinion. After all, their money is on the line in exactly the same way as that of other investors. And one golden rule to remember is that no one cares about your money more than you do. 

Based on current estimates, CMC’s shares currently trade on a forward price-to-earnings (P/E) ratio of 11. Whether those estimates will need to be adjusted later down the line is another thing entirely.

As such, I’m prioritising adding to my holding in market leader and FTSE 250 member IG Group for the time being, given the 7.8% dividend yield on offer. 

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.

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