With markets so volatile at the moment, it's tough to find a stock that pays a reliable return. But this company thrives on volatility, says Bengt Saelensminde. And with a blistering year of growth forecast, it could make you great profits.
If all this market volatility is making you sick, I've an idea you should like today.
Here's a company that just thrives on volatility. I'm betting that it's going to turn in a blistering year of growth and that could make you a great return.
The UK's oldest spread betting firm, IG Index, released its first quarter results yesterday and they were mouth-watering. Take a look at this.
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Revenues surge as traders rush to cash in on volatility
IG's revenues were up by 26% on the same period of last financial year thanks to people's hunger to trade in these tricky times. It's benefiting from an end to "boring" market conditions earlier in the year, says chief executive, Tim Howkins.
As markets bounce around, traders use IG's platform to make trades normal stock brokers can't do.
First off, spread betting makes it dead easy to go short, ie bet on falling prices. At the click of a mouse, investors can short anything from shares, industry sectors, commodities, currencies or indices all over the globe.
We've already used a short here at The Right Side to profit from the crashing UK bank sector. We could have further shorting opportunities in the future I'll let you know.
But it's not just shorting that makes spread betting a trader's tool of choice in volatile markets.
In volatile markets, traders look to get in and out of their trades quickly. Spread bets are ideal. There's no commission to pay on your trade (just the spread), which means trading costs are held down, and gains are tax-free.
And IG's trading platform is excellent. I use it all the time. Traditional stockbrokers don't offer anything like the tools you can get from these guys. That's why spread betting is so popular at times like this.
But here's where volatility really helps IG's business.
Bad news for traders is great news for IG
Most spread betters take advantage of leverage. They put down a small deposit to get a large exposure. And to try to avoid losing too much, they use stop losses to get out if the markets move against them.
I've warned you about the dangers of stop losses before. Badly placed stops are sure to get hit especially in volatile markets. You can place the best trade in the world, but with a badly placed stop loss, you can easily get knocked out as the market goes the wrongway - even if it isjust for a few seconds.
The market has an uncanny way of reaching down, grabbing badly placed stops and then moving back up to where it should be. Bad news for inexperienced punters but great news for IG, which reaps the rewards!
And this is showing through in IG's growth figures.
How IG is growing fast around the world
IG's Australian and European operations saw revenue grow by more than 50%. And in the rest of the world (incorporating US, Singapore and South Africa), it was nearly 80%!
That's blistering growth as it sets up shop all over the world. And it's been spending serious money on IT platforms as part of the expansion plans. This year will be no different. Growth, growth, growth. That's what it's all about.
So what should you pay for such a high growth business? Well, with the stock market trading on around ten times earnings, I would have thought we'd need to pay maybe 15 times earnings.
But IG trades at just 11 times 2012 forecast earnings. That looks great value to me especially when you can pick up a yield of 4.5% while you own this stock.
I tipped IG last November at around 470p. Since then, it's moved down, roughly in line with the market. At 440p, they're down 5.5% versus -6.6% on the FTSE All-Share.
That doesn't seem right to me. This is a business that's not only growing during these tough times, it's positively thriving. In my opinion, a stock like that should be outperforming the market much better. I think it will in time.
Obviously, there are risks. Any business that's expanding rapidly into new markets can find that things go wrong. Local regulations can hinder the business especially one like IG that's involved in financial markets.
Operationally too, you may find that local markets aren't quite as easy to navigate.
But I like IG. It's paying me a 4.5% dividend and that dividend is twice covered, meaning IG could afford to pay it twice over from its earnings.
That's very attractive, especially when you're looking at a stock with great growth potential. I'm not surprised analysts have increased their targets, with Singer Capital looking for 540p and Numis valuing it at 616p. On a 12-month basis, that doesn't look stretched to me.
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Frank Hemsley. The Right Side is issued by MoneyWeek Ltd.
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.
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