Can I make money from UK shares by buying big fallers and waiting for them to recover? It’s a contrarian strategy that’s popular with billionaire investor Warren Buffett, among others. The legendary US investor has previously said that “the best thing that happens to us is when a great company gets into temporary trouble”.
The top faller on the UK market today is down by 17% as I write. Shares in this business have now fallen by 50% over the last year. Despite this, I think it’s a good business. In my view, the shares now look cheap. Should I buy this stock for my portfolio?
Profit down 59%!
The company in question is FTSE 250 trading and investment platform CMC Markets (LSE: CMCX). Like most companies in this sector, CMC is suffering a nasty hangover after the lockdown trading boom that took place during the pandemic.
Today’s final results show the scale of the slump. CMC’s net operating income fell by 31% to £282m during the year ended 31 March. Pre-tax profit dropped 59% to £92m.
However, I think these numbers only tell half the story. CMC’s net operating income is still 12% higher than it was during the 2019/20 financial year. Client numbers are higher too, suggesting that many of the new clients CMC won in 2021 have stuck around.
New growth opportunities
Founder and chief executive Lord Cruddas owns more than 50% of CMC stock, so he has a strong incentive to return the business to profitable growth.
One area he’s targeting is the expansion of the group’s leveraged business. This operation allows investors to use spread bets and CFDs to bet on market movements and generates the majority of profits.
The main problem with the leveraged business is that profits tend to be volatile, depending on market conditions. There are also regulatory risks. Most traders lose money with leveraged trading, so the UK regulator (and others) have targeted this sector with stricter rules in recent years.
To find new ways to expand its leveraged trading business, CMC is targeting business clients. These aren’t bound by the same regulations as retail traders and could bring substantial new business to CMC.
Alongside this, it’s targeting a bigger presence in the UK share-dealing market. The company is about to launch a new low-cost platform that will compete with rivals such as IG Group and Hargreaves Lansdown.
Lord Cruddas says CMC is basing its UK strategy on its successful business in Australia, where it’s “the number two investment platform for retail investors”.
Why I’d buy this UK share
Despite last year’s profit slump, it remained very profitable. The group generated an operating profit margin of 28%, which is in line with its pre-pandemic performance.
The group’s expansion plans look sensible to me. I expect to see a return to growth over the next couple of years.
After today’s fall, CMC shares trade on around 10 times forecast earnings, with a dividend yield of 5%. That looks cheap to me for such a profitable business.
But it’s not quite cheap enough yet, mainly because I already own shares in rival IG Group. I’d be happy to buy CMC shares for my portfolio today if I didn’t hold IG, but I will consider buying CMC if it falls further.