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Is CME Group a Buy?

By Jennifer Saibil - Updated Mar 15, 2021 at 11:30AM

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The derivatives trading market leader had a tough 2020.

2020 was a great year for the stock market, despite extreme volatility. The S&P 500 ended the year up 16%, and many companies that benefited from an accelerated shift to digital operations had huge gains; even in many of the industries that were most impeded by the pandemic, stock prices recovered to close out the year in positive territory.

CME Group (CME 2.09%), which operates futures and options exchanges, was affected by low interest rates throughout the pandemic. Many institutional clients manage risk by investing in CME's traded commodities, and suppressed rates meant there was less of a need for risk management.

CME stock was slightly down in 2020. But it's up almost 14% this year at Monday morning's prices. Is now a good time to buy?

Two people looking at data on a computer with a finance board in the background.

Image source: Getty Images.

What does CME Group do?

CME calls itself "the world's leading and most diverse derivatives marketplace." It owns several exchanges, such as the Chicago Board of Trade (CBOT) and the New York Mercantile Exchange (NYMEX). It acquired BrokerTec, an electronic bond trading platform, in 2018, and is still migrating its technology over to the CME platform. In December, it announced that it's acquiring data provider IHS Markit, which will provide further access to new customers and improved data for clients. 

Second and third-quarter revenue declined, but fourth quarter results showed some improvement, staying flat year over year, at $4.9 billion, income didn't move either, staying at $2.1 billion.

CME recently launched futures trading in Ethereum's cryptocurrency token, Ether, to add to Bitcoin futures and options. Ethereum is the second-largest cryptocurrency by market cap, and this makes investing in CME a great way to profit from the trend without all of the risks of actually buying cryptocurrency tokens.

How can CME move forward?

Market volatility is generally a good thing for exchanges, because when prices swing, more people buy and sell, leading to more fees. But in several asset classes that CME exchanges trade, volatility was low in 2020, which meant fewer transaction and clearing fees.

For example, interest rate products accounted for almost half of the average daily volume in 2019's fourth quarter but just over a third in Q4 2020. With benchmark rates hovering near zero, there was less volatility, and thus less trading volume.

Metals, like gold and silver, had a fifth year of record volume, and agricultural commodities, such as soybean futures, performed well. Data services were an important addition to CME's sales picture -- revenue from that segment grew by 5% as more people were working from home and needed fast data access. The company is looking to expand this business segment in 2021. Device sales were up 7% in Q4.

Owning more trading platforms allows the company to manage overall volatility by offering many trading options, and that played out with some of the stronger trading classes making up for drops in others. Adding acquisitions rounds out the company's business to hedge its own risk in uncertain times. The company's performance should also improve as the economy does.

Dividends and stock prices 

CME Group hasn't been a great stock over the past three years -- it's only up by 25%, compared to the S&P 500's roughly 40% gain. Its dividend, though, makes its returns a bit more attractive. It yields only 1.7% at the newly elevated share price, but management has been boosting it steadily for almost 20 years. 

The company also pays a special dividend annually. The last one, paid in January, was $2.50. Add that into the total and the stock's yield is closer to 3%.

If dividends are your thing, CME Group a relatively low valuation of 35 times trailing 12-month earnings and the promise of a solid income investment. The company has a strong group of assets in its exchanges, and it's making moves to promote growth. But the stock price itself may take a long time to recover. If you're looking for gains, there are other financial services stocks that are likely to provide shareholders with higher growth.

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Stocks Mentioned

CME Group Inc. Stock Quote
CME Group Inc.
$200.10 (2.09%) $4.09
IHS Markit Ltd. Stock Quote
IHS Markit Ltd.
Bitcoin Stock Quote
$30,069.60 (-0.25%) $-74.73
Ethereum Stock Quote
$2,052.06 (0.09%) $1.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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