The top four things I look for in a stock
When it comes to buying shares, I look for stocks that meet my four risk-management objectives, says Bengt Saelensminde. And this stock still ticks all the boxes.
I recently told you I'm currently invested 25% in bonds,25% incommodities and25% incash.
Of course, it didn't take long before one reader asked the pertinent question: "So where is that last quarter invested?"
Well, though I said on Friday, "Equities are for show Bonds are for dough", I'm not afraid to say that I'm still 25% into equities.
As far as the industry average goes, that's very low. And it's because I think there's a lot of risk involved with equities over the short term. I'm looking forward to upping my equity allocation down the line.
Nonetheless, there are some great equities out there. Today, I want to show you four things I look for in equity investments these days... and I'll show you a share that I think fits the bill.
This stock thrives on volatility
It was at the beginning of December 2010 when I first covered spread-bet provider IG Index (LSE: IGG) as a great stock set to thrive on market volatility.
And you can bet we've seen some market volatility since then.
On Thursday, IG released a pre-close trading statement... that is, a brief summary of what we can expect to see when the full-year figures are published in mid-July.
And from what I can see, this looks like it's going to be another set of cracking figures.
Source: Digital Look
Overall, revenue will be up 17%, and margins (before tax) are expected to come in at a very healthy 50%.
So let's take a quick look at four reasons why I like IG Index, and why I think it's likely to prove resilient whatever the market throws at us.
IG is the world's biggest spread betting company
When it's boom-time, many new businesses are established and many do well... for a while anyway. It's only when we fall on tough economic times that some of the, how shall I put it, less stable operators come to light.
If you followed my spread-bet on the break-up of the euro, you'll know what I mean. It turns out that our bet provider, WorldSpreads, wasn't exactly what you might call a thoroughbred.
And asit went caput, that left IG Group with one less competitor. IG say it's also benefited from the blow-up of MF Global, as clients headed onto their books.
As far as financial punters are concerned, they want to deal with a big and stable business. And that's what IG offers. IG's largest market is the UK, and it's the biggest spread-bet company in the game. UK turnover was up an impressive 15% for the year to the end of May.
But it's not just UK growth that interests me. With any stock I buy today, I'm usually looking for some international expansion...
With revenue growth of 22% in Australia, 26% in Europe and a whopping 43% for the rest of world', it's clear this business has found a decent route to international expansion.
The company states that "The continued positive performance from Rest of World was driven by strong growth in both Singapore and South Africa". This is what I love to see; a decent business model that has been proven to work here in the UK being deployed to some of the highest growth markets in the world.
So what is that great business model?
It's all about risk management
One of the biggest concerns ofinvesting in the financial sector is, of course, the fragility of the financial system. If the markets go down, then it seems financials go down double.
But IG shouldn't be tarred with the same brush. These guys are more like a bookie than a bank. You might not like that aspect to it, but it means that the business is all about risk management. It's about making sure they make money no matter what the markets do. I'm not saying it's always possible, but that's the aim. As a bookie, there are all manner ofways of mitigating and hedging risk. That's the central plank of this business.
And from what I can see, it's working pretty well. Just look at how earnings per share (EPS) have grown over the last five or six years. That is from before the great crisis of 2008, and all the way through it.
I think you'll agree this looks like fairly consistent growth throughout all this economic turmoil. If anything, these guys love volatility. Punters are much more likely to use IG when the markets are all over the place.
When I first wrote about this stock in December 2010, its price was near as damn-it exactly the same as it is today, that is £4.70. And wouldn't you know it, so is the stock market. As I write, the FTSE stands at 5,470, exactly where we were at the beginning of December 2010.
Now that doesn't mean we've had no value out of IG, as its dividend equates to about 4.5%. That's not a bad little payout. Remember, this is a growth stock you wouldn't normally expect an above average dividend payment which this is. The FTSE 100 currently pays 3.9% and the FTSE 250 an even less generous 3.0%.
On a price/earnings (p/e) basis, the stock's trading on a forecast 12.5 times earnings for the year just ended. What can we compare that to? Well, the FTSE financials stand at 14.7 times earnings. So, relatively speaking, the price looks cheap. And to my mind, IG has a much better business model than most financials out there.
I think IG's potential makes it a risk worth taking
As with any share, there are risks to consider.
Though I say this firm is all about tight risk management, the problem is I can't verify that. IG will never release full details about exactly how they manage risk. This is commercially sensitive stuff. And anyway, risk management systems can always go wrong. The fact that, to date, they've proved very effective is no guide to the future.
Though I like IG's international growth, there's no doubt that it's still a UK-centric business. Over half its revenues come from the UK. That leaves the business heavily exposed to any changes in UK regulation and tax. Spread bet users benefit from some fantastic tax advantages and with our government on the prowl for a few more 'donations', they may want to make some adjustments. And that could be bad news for IG's business model.
But overall, this is the sort of stock I like. It meets four of my objectives for a stock during these tumultuous times
It's a market leader in its field. It's got great international growth potential. It thrives on market volatility. And, last but not least, it looks attractively priced with a reasonable dividend yield. For me, that makes the risks well worthwhile taking.
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