Financial services companies form the backbone of markets, offering solutions from exchanges where market participants can buy or sell assets to data providers who help investment professionals make sense of troves of data. Companies that provide these crucial services can make solid investments because of their steady cash flows and ability to profit in different market conditions.
CME Group (CME -0.75%) and FactSet Research Systems (FDS 0.66%) are two stocks with excellent businesses. These companies have strong competitive advantages and favorable trends that benefit their business.
Here's why investors should consider buying these two stocks today.
1. CME Group dominates derivatives and has seen robust demand
CME Group operates a financial exchange that allows investors to buy and sell derivatives, which are financial instruments that get their value from some underlying asset, like stocks or bonds. Derivative contracts include futures, forwards, and options traded on CME Group-owned exchanges, including the Chicago Mercantile Exchange, Chicago Board of Trade, and New York Mercantile Exchange.
CME Group is the world's largest operator of derivatives exchanges and has a strong moat, or competitive advantage, due to its dominant position. The company acts as a clearinghouse for all trades on its exchanges and earns clearing fees in return for guaranteeing these contracts will be honored.
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Last year was solid for the exchange operator. Volatility was ever-present in financial markets, driving robust demand for derivative products. In 2022, CME Group's average daily volume was $23 million, boosting clearing and transaction fees, which increased 10%.
Moving forward, CME Group should continue benefiting from volatile bond and stock markets. Interest rates have been especially volatile, with the 10-year Treasury bond reaching its highest yield since 2007. This year, CME Group's revenue has grown 8%. Robust trading activity continued in the third quarter, and its average daily volume of 22.3 million contracts was its second-highest third-quarter volume ever.
CME Group has a strong moat and dominates the global derivatives market. Its earnings can fluctuate based on volume. However, as the top derivatives exchange operator, its business has steady demand. As volatile market conditions persist, participants will continue to look to derivatives to protect themselves from stock and bond volatility, making CME Group a solid buy this October.
2. FactSet Research Systems' data advantage has it positioned for long-term growth
FactSet Research Systems provides data and analytics to investors, including banks, hedge funds, asset managers, and individuals, to name a few. Its slew of economic and investment data is in high demand, giving it a robust economic moat. The company charges subscription fees for access to its data and software, which are a steady stream of recurring revenue.
Demand for FactSet's data is undeniable. Over the last decade, the company's annual revenue has gone from $870 million to $2.08 billion. Its free cash flow, or the cash flow left over after paying operating expenses and maintaining capital assets, has grown over the past 10 years from $250 million to $585 million.
There have been concerns that customers could cut costs, including data subscriptions. Thus far, that hasn't been the case. Through the first nine months of FactSet's fiscal year (ended May 31), FactSet's revenue of $1.5 billion and net income of $403 million are up 15% and 38%, respectively.
FactSet's data and software are in strong demand and should continue to experience growth in the years ahead. According to a report by Fortune Business Insights, the global financial analytics market is expected to grow by 11% annually through 2030. This should provide a long-term tailwind to FactSet's expansive data business, making this financial services stock another solid addition to your portfolio this October.
