Weekly Round Up: CMC Markets, 888plc & more

Weekly Round Ups are posted on my Patreon and contain analyses of news, corporate results and wider economics that affect my portfolio holdings and similar quality businesses.


The below is an excerpt from the Weekly Round Up posted on 7th September 2021.


Good evening all,


I hope you got a chance to check out the August Portfolio Update that I released on Sunday, detailing all of my latest trades and goings-on for the Personal and the Family portfolio over the month. Both of the companies I purchased for the Family portfolio Darktrace and Ambu A/S look to have great prospects for the future.


Markets


Over the last week we had quite a bit of corporate news to digest, especially in the UK, with updates from CMC Markets, the financial spread betting provider, 888plc the digital-only gambling company and, of course, the takeover attempt for UK back-office automation technology provider Blue Prism.


In the US, notable earnings were delivered from spirits company Brown Forman (Jack Daniels), Cooper Companies, the contact lens specialist detailed in my March Visionary Riches newsletter and portfolio holding Veeva Systems, a life sciences cloud solutions provider.


Kicking off in the UK, the latest corporate raid of British business was a takeover bid for Blue Prism, which follows a period of abnormally high levels of M&A activity from international buyers. Morrisons, Meggitt and Ultra Electronics were all bidded for by US companies or private equity corporations. I am pretty sure we are all well aware that UK shares are cheap in comparison to their international peers in the US and even in continental Europe — a fact that the UK financial press like to remind us of quite regularly. US equity valuations are historically looking very strong. Therefore, it makes sense for US listed companies to issue new shares and make some acquisitions. Given that I think it is unlikely for the below graph of US and UK prices to invert any time soon (due to structural challenges for the UK and a lack of global stock leaders), I would expect the corporate purchasing activity to continue. Despite quite a large data set for recent takeovers, there really hasn’t been one set theme for acquisitions, seeing as takeover bids have occurred in industrials, technology and retail with no real preference for UK based or internationally focused businesses.

A graph from Bloomberg comparing UK stocks' valuation multiples (the MSCI United Kingdom Index) compared to the MSCI USA Index, the MSCI Europe Index and the MSCI AC Asia Ex. Japan Index. The graph shows that UK stocks' valuation multiples are depressed compared to other regions.

Bloomberg index data


CMC Markets


CMC Markets, a UK listed financial trading platform, produced a trading update in the week, sending the shares falling 30% on the day. Although the opening statement of the trading update alluded to ‘significant momentum’ for the business, subsequent notes described declining volatility, which resulted in less frequent trading and thus an almost halving of net income this year versus the prior year, which was boosted significantly by Covid-19 induced lockdown trading. To my understanding, platforms such as CMC, Plus500 and, to a lesser extent, IG offer more leverage, lower cost trading and appeal to a different customer base than the investment style platforms such as Hargreaves Lansdown or AJ Bell. It is likely that spread betting platforms did appeal to new retail investors and traders struck with boredom during lockdowns and likely took overall market share from live gambling venues, as individuals who may have been placing bets at live events turned to online financial betting for entertainment. Given the results from Best of the Best recently (declining engagement and the stock hit -45%) we probably could have seen the trouble at a business such as CMC coming.


A source from the Hargreaves Lansdown Investor presentation on stockbroking volumes in the UK. The source contains two graphs, both of which contain information on stockbroking volumes in the UK. The first graph shows that in 2021, the number of deals per month on the UK stock market dropped drastically from almost 1,800,000 to 1,000,000 between the months of February and May. The second graph shows that during the lockdowns in the UK due to Covid-19 in both April 2020-July 2020 and January 2021 to April 2021, the number of deals made on the UK stock market rose drastically compared to dealing volumes out of these lockdowns.

Hargreaves Lansdown Investor Presentation


But we also could have seen the cold hard facts from Hargreaves Lansdown's recent report on trading activity at their year end on the 9th of August. Pictured above you can see on the left the sharp drop off in trading volume in 2021 compared with the prior year. On the right, HL have very transparently correlated their peak trading volume with the covid lockdowns. I know this may seem a little ‘after the fact’, however, it highlights the need to read into similar businesses that you hold to get an early read on your own stock’s performance. I think the recent news at CMC, and the data above from HL, should certainly put anyone off owning the spreadbetters for now.


This is a screenshot of the Google market summary on CMC Markets Plc. It shows the stock price over a period of 5 years.

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