In a challenging year, some FTSE 350 shares are well down. One that has caught my eye – and stands out from the usual suspects like airlines and pub operators – was spread-betting group CMC Markets (LSE: CMCX). The share price of this FTSE 350 group is down 40% this year. To me though, the sell-off in the shares seems very overdone.
What went wrong?
The shares have been among the heaviest fallers this year due primarily to profit warnings, because 2020 was such a bumper year. Spread-betters tend to do well in volatile markets, and 2020 was understandably tumultuous. The erratic behaviour of the market drove more trades on CMC Markets’ platforms. That made growing against those high numbers from 2020 more challenging this year.
For example, the shares fell 27% as it issued a profit warning in September. “Subdued” trading in July and August resulted in less cash coming in from both new and existing customers. As a consequence, he group lowered its earnings forecast, not something investors like to see.
It did this at a time when many other shares were recovering as 2021 was, for many businesses, a more normal year than 2020. In short, CMC was punished this year for being a lockdown winner. 2021 was instead a year for pandemic recovery shares. Â
Why this FTSE 350 share could be a winner again
However, I’m more interested in the future. With the shares now well down on the level at which they started 2021, I think CMC shares are bargains. They trade on a forward P/E of just 10.
The shares provide a high level of income as well, which I think partially offsets the risks that come with owning this potentially volatile stock. They yield nearly 5%.
As essentially a platform-based business CMC has high margins and returns on capital employed. Costs are relatively fixed so a higher number of customer bets feeds directly through to greater profits. In good times, it’s a great business model.
Another major positive for me is that the founder, Lord Peter Cruddas, is still involved with the business and is a major shareholder. So management is incentivised to keep shareholders front of mind and have aligned interests. Sadly, this is not always the case at listed companies.
Lastly, one last reason for me to invest is that CMC is evolving in a way that could add value. It is exploring whether to split itself into a retail operation and a spread-betting one. A move that analysts seem to back. It’s also launching a new UK investment platform in 2022.
2021 highlighted the risks of investing in spread-betters like CMC. Earnings can be lumpy and are affected by what is happening in the stock market, a factor beyond management’s control.
That said, I’ve just very recently bought shares in the firm so I have skin in the game and expect to see them bounce back in 2022.