Why Are Securities Exchanges Great Stocks Now?

One can’t miss the flurry in securities exchanges as companies scurry for an initial public offering. Heightening the frenzy is better trading volumes for all goods and commodities as well as launch options of futures contracts.

The long lineup of trade on the bourses includes equities, commodities, derivatives, debt and ETFs or exchange traded funds to name a few. And though volatility and uncertainty are so commonplace, investors no longer look harried by these market vices.

In fact, this seems the right time to invest in securities exchanges. Here’s why:

When a volatile price environment prevails, hedging traders can lower the risk through futures contracts. And in the heavy trading that ensues, the exchanges stand to gain from higher transaction and listing services fees that improve their revenues. Plus, increased activities in exchanges indicate economic stability. The exchanges too are doing their bit by making their offerings meatier.

Attractive Features

Almost all securities exchanges are adding convenient operations and trading features. The Nasdaq OMX Group, Inc. (NDAQ - Analyst Report) launched a unique solution to provide marketplaces with an extremely adaptable index calculation platform – the Nasdaq Index Calculation System. The platform highlights intuitive, index calculation aimed at making computation of multi-asset, multi-currency indices convenient.

The exchange is also exploring the blockchain technology that will make the digital ledger technology available to private companies issuing and transferring shares on the Nasdaq Private Market.

Recently, CBOE Holdings, Inc. (CBOE - Analyst Report) launched 10 options-based strategy performance benchmark indexes to use options as risk-management and yield-enhancing investment tools.

In mid July, Intercontinental Exchange Inc. (ICE - Analyst Report) announced that it will launch the cotton futures contract later this year upon approval by the U.S. policymakers. Last month, the company launched Eris standard interest rate futures contracts denominated in Euro and Pound Sterling.

Scope from Overseas Turmoil

Economic turmoil in foreign countries also keeps exchanges active. This was evident during the recent Greece uncertainty and the Chinese equity market gloom.

With a host of companies like SoulCycle, Vizio, Square, Sunrun, Philadelphia Energy Solutions, Amplify Snack Brands, among others, filing for their IPOs, the securities exchanges are well poised for top-line growth.

Technological Advancement

Moreover as the securities exchanges mostly trade electronically, efficiency, exposure, speed and security are ensured. For the same reason, pits are losing importance with minimum contribution to overall trade on exchanges and companies are taking harsh decisions to close them down. On the flip side, with increasing dependence on technology, comes the risk of technical glitches that sometimes halt trading and affect the U.S. benchmarks.

Memories of a stock exchange snafu on the day of the much-awaited initial public offering of Facebook Inc. (FB - Analyst Report) are still fresh in investors’ minds. Early this month, another technical crash halted trading on the New York Stock Exchange (part of ICE).

Capital Strength

And while the securities exchanges are trying out various crowd pullers, it is important to note that they are not going OTT. These companies are also focusing on expense management to enhance operating margin leverage. Their operational confidence and ample liquidity help in rewarding their shareholders through dividend hikes and share repurchases. Recently, CBOE Holdings increased its quarterly dividend by 10%.

Year to date, the securities exchange stocks have returned more than the Dow Jones. While return on stock for Nasdaq OMX Group is 6.32%, CME Group Inc. (CME - Analyst Report) has returned 9.42% and Intercontinental Exchange has returned 4.45% –– much above Dow Jones -0.43%.

Zacks Industry Rank & Favorable Picks

Moreover, the Zacks Industry Rank for the securities exchange industry is #11, which is on the upper end of the top 1/3 tier of the Zacks Industry Rank. This reflects an extremely advantageous position among the 260+ Zacks industry groups.

While one can add companies that trade on exchanges, it’s now time to add a few securities exchange companies to one’s portfolio considering the favorable conditions this industry is offering.

Benchmarking a favorable Zacks Rank and upward estimate revisions, we shortlist three stock exchanges that have huge investment potential:

CME Group is the largest futures exchange in the world in terms of trading volume as well as notional value traded. This Zacks Rank #2 (Buy) exchange came up with a positive earnings surprise of 3.3% with its second-quarter earnings release yesterday, and surged 23.4% year over year on improved trading volumes.

It boasts straight four quarters of positive earnings surprises, with an average beat of 2.8%. The company also witnessed positive estimate revisions in the last 30 days. The Zacks Consensus Estimate moved north by 1.3% for 2015 and 0.7% for 2016.

MarketAxess Holdings Inc. (MKTX - Analyst Report) is a leading multi-dealer trading platform that offers institutional investors access to global liquidity in products like U.S. high-grade corporate bonds, emerging markets and high-yield bonds, European bonds, U.S. agency bonds, credit derivatives and other fixed-income securities.

This Zacks Rank #2 exchange delivered strong second-quarter earnings driven by an increase in revenues as well as record volumes across its core products. MarketAxess also witnessed positive estimate revisions in the last 30 days. The Zacks Consensus Estimate moved up 1.2% for 2015 and 0.6% for 2016.

Nasdaq OMX Group Inc. provides trading, exchange technology, securities listing and public company services. This Zacks Rank #3 (Hold) company reported record second-quarter earnings, surprising positively by 3.7% and improving significantly year over year.  With the Zacks Consensus Estimate moving up 1.8% for 2015 and 0.8 % for 2016, the stock witnessed positive estimate revisions in the last 30 days.

Too Good to Be True

Rarely do we come across so upbeat an industry. Earnings beats, solid Zacks Ranks, favorable conditions and upward estimate revisions guarantee share price appreciation.Of course, one can always add companies that trade on exchanges. But clearly now is the time to add a few securities exchange companies to the portfolio.

Disclosure: None.

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Vintage Vixen 8 years ago Member's comment

You mention the July 8 'snafu' but neglect to mention that ICE stock dropped 3% that day as a result. Imagine what if an exchange actually WAS hacked? These don't seem like really safe investments to me.