Some of the warning signs are flashing that we may see another market pullback. Unemployment is still high, and we remain in a recession while COVID-19 cases are ticking back up in parts of the country. While vaccines and treatments seem much closer on the horizon, it's uncertain when we will see one. Meanwhile, the stock market, led by a booming tech sector, has roared back from the first crash to the point that some investors worry valuations are irrationally high.
While it's natural to be anxious, it's best to stay committed to your long-term plans. But it may not be a bad idea to add some ballast to your portfolio to prepare for all events -- and MarketAxess Holdings (MKTX 1.67%) is a great stock to do just that. This fintech combines low volatility with consistent earnings, and it may be just what you're looking for.
Market leader in bond trading
MarketAxess Holdings has performed well in all markets because of the leading position it occupies in its niche. It performs well when times are good -- and sometimes even better when times are tough.
MarketAxess operates a platform for electronic trading of fixed-income securities, like corporate and emerging market bonds, for large institutional investors. The company's Open Trading platform provides a single source for investors and traders to access liquidity from more than 100 broker-dealers and 1,000 institutional investors. It has become the market leader in this space, saving clients stress and money by increasing trading efficiencies and expanding the liquidity pool.
The Open Trading platform has grabbed an increasing share of the U.S. credit markets. Its share of the U.S. high-grade bond market has increased 21% over the last five years from 14%, and up to 10% in the U.S. high-yield bond market from 5%.
In the second quarter, revenue jumped to $185 million, up 47% from the same period the year before, on record bond issuance and elevated credit spread volatility. Operating income was up 71% to $104 million, while the operating margin was 56%, up from 48% a year ago. Net income almost doubled to $83.9 million, or $2.20 per share, compared to the second quarter of 2019, when it was $48 million.
"Institutional investors and dealers both leaned into our Open Trading marketplace to meet their trading and liquidity needs, driving record estimated market share for both high-grade and high-yield bonds on the system. Estimated transaction cost savings delivered back to our clients reached an all-time high, with client savings exceeding company revenue for the second quarter in a row," Rick McVey, chairman and CEO of MarketAxess, said of second-quarter earnings.
September was another strong month as trading volume soared 161% to $461 billion, including $206 billion in credit volume and $255 billion in rates volume.
Low volatility, high growth
Market volatility has clearly been good for MarketAxess Holdings, as the company brings in about 90% of its revenue from commissions on trades on its platform. So, any volatility we see in the markets over the next 12 months will likely benefit MarketAxess.
The stock price is up almost 50% this year, but it's not a short-term story. Since 2015, credit trading volume grown about 16% annually, while revenue has grown 9.7% per year and net income has climbed 14% annually over that same period. As for the stock price, MarketAxess has not had a negative year since 2008. Ten years ago, it was trading at around $18 per share; at Thursday's close, it was $567.37 per share. That comes out to an annualized return of about 40%.
While the stock's price-to-earnings ratio is high at 82 times earnings, the company has proven its earnings power through all market cycles. That may be why the stock's own volatility is so ridiculously low. MarketAxess' beta is 0.51, which means it fluctuates much less than most stocks (a beta of 1 means a stock is as volatile as the overall market). Plus, it has high margins, as well as free cash flow that has increased 50% year over year to $86 million.
If you're worried about another crash, companies that can perform in good and bad markets alike are a good place to start. If that sounds good to you, consider buying some shares of MarketAxess to anchor your portfolio.