Here's an idea -- instead of investing in a stock or derivative on a particular market, why not invest in the market itself? Numerous stock and derivatives exchange operators are publicly traded, making them offbeat and occasionally lucrative investment choices. One of these companies is Cboe Global Markets (CBOE +1.41%).
Stocks and derivatives are popular just now, as demonstrated by humming bourses around the globe (a bourse is a stock market in a non-English-speaking country). Let's see if this and other factors mean you should go to market to buy this market, so to speak.
Image source: Getty Images.
Optional participation
Cboe's name derives from its founding asset, the Chicago Board Options Exchange, the largest options market in the world. With the assets it's collected over the years, it now, in its words:
... offers trading across a diverse range of products in multiple asset classes and geographies, including options, futures, U.S. and European equities, exchange-traded products (ETPs), global foreign exchange (FX), and multi-asset volatility products.
Perhaps Cboe's most high-profile asset is the VIX Index, which carries the memorable nickname "The Fear Index." This is a gauge of activity in the pricing of options linked to S&P 500 stocks. As such, it's considered a good yardstick of the mood of active investors.
Cboe derives nearly all of its revenue as a middleman for trades in its many and varied securities and derivatives; the bulk of its take comes from options. In the company's most recently reported quarter, net revenue broke down like so:
| Source | Q3 Net Revenue (in millions) | Share of Total Revenue | Change (YOY) |
|---|---|---|---|
| Options | $133.2 | 49% | 2% |
| Equities (U.S.) | $71.4 | 26% | 2% |
| Futures | $30.0 | 11% | (23%) |
| Equities (Europe) | $22.3 | 8% | 21% |
| Foreign exchange (global) | $13.6 | 5% | 20% |
Data source: Cboe Global Markets. YOY = year over year.
Options and U.S. equities together comprised a full three-quarters of its revenue base in Q3. The remainder is, to my mind, spread pretty well among the last three categories, giving the company some needed diversification.
Although overall growth was basically flat in Q3, at the end of last year, markets became volatile -- which can be beneficial for exchange operators, particularly those chest-deep in options. This is because hedgers buy such instruments to limit potential losses, so there's a lot of action. Equity markets also tend to be busier, with nervous investors selling off positions and opportunity hounds snapping them up.
For December, Cboe's monthly trading volume for options grew a muscular 21% year over year (to 165 million contracts). For options, the improvement was 7.5% to just over 6 million contracts. U.S. equities saw a nice spike at 34% to 30.6 million shares traded. As the top three revenue-generating activities for Cboe, this bodes quite well for the company's fourth quarter.
Exchange rates
Your view of Cboe stock largely depends on how you feel the equity and related markets in the U.S. will trend. Again, volatility favors an options-heavy operator like Cboe. If you believe we're in for more see-sawing before long, the company's stock might just be a buy for you.
However, according to Yahoo! Finance, 15 analysts track Cboe shares. These folks don't seem to think we'll be rocked by huge waves of volatility -- at least judging by their tepid growth estimates for the company. Collectively, they're projecting only a 4% year-over-year rise in net profit for fiscal 2019, and a slight uptick in revenue.
If you're interested in exchange operators, you might instead want to consider Intercontinental Exchange or CME Group. Of the pair, CME Group is the company most comparable to Cboe, as it's strong in derivatives markets. It's more diversified than Cboe, and analysts believe its prospects are brighter: 2019 net profit is expected to increase by 9% from 2018 levels, and revenue by a healthy 23%.
As for Intercontinental Exchange, it's known more for its equity markets -- it's the owner of several top-shelf ones, including the New York Stock Exchange. Encouraging growth is also expected for Intercontinental Exchange; like CME Group, its profit is projected to climb 9% from fiscal 2018 to 2019. Revenue, meanwhile, should advance by 7%.
Check out the latest Cboe Global Markets earnings call transcript.
