Financial trading platform CMC Markets (LSE: CMCX) has seen a share price tumble of 4.1% in today’s trading so far. But this is nothing compared to the huge 24% fall it saw at the start of September. For a stock that performed well in the past year, as trading activity rose significantly on stock market fluctuations, this looks startling.
CMC Makes disappoints with updates
But there are good reasons for this. The company has released significant updates since the start of September. The first was its trading update where it downgraded its earnings expectations. It now expects net operating for its financial year ending 31 March 2022 to range between £250m and £280m. This is a 15% to 25% decrease in expectations from the earlier number of £330m.
This resulted in a sharp fall in its share price, sending it back to its June 2020 levels and wiping out all the gains made in the past year. Then it fell further today after it reiterated its guidance. Investor disappointment is understandable. Growth investors like me would look at the company’s price-to-earnings (P/E) ratio to get a sense of how much potential there is for the price to increase. A drop in earnings means that the price needs to adjust accordingly, and that is exactly what has happened in this case.
An eye-popping dividend yield
Dividend investors can be disappointed too. CMC Markets has a massive dividend yield of 11% right now. This is undoubtedly elevated because of its recent share price plunge. But even otherwise, it has shown a healthy yield. Over the past five years, it has averaged 6%. But dividends depend on earnings. So if the company downgrades earnings forecasts, it means a smaller dividend increase.
A case for the FTSE 250 stock
Still, at the present yield levels, I think there is still a strong case for me to buy the stock. This is especially so considering that its P/E is already quite muted at just 4.5 times. Barring any more downgrades, I think it looks like a good stock to buy now. And to be fair, the company had already warned us of moderation in results going forward.
Further, its recent acquisition of more than 500,000 investor accounts from Australia and New Zealand Banking Group, better known as simply ANZ, is encouraging. Since 2018, CMC has provided a white-label service to these clients anyway through its trading technology. The acquisition can add significantly to its revenues, allowing for future growth.
What I’d do
So, despite the latest reduction in income projections, I am pretty bullish on the FTSE 250 stock. Bullish enough to have bought its shares recently. I do think that it is vulnerable to broader stock market conditions, but also that it is a stock with high potential. Now that it has fallen, I think I will buy more of it.