The Zacks Securities and Exchanges industry comprises companies that operate physical or electronic marketplaces, which facilitate the buying and selling of stocks, stock options, bonds or commodity contracts.
These companies generate revenues from fees received from the listed companies on their exchanges. The industry players also provide a range of data and listing services to global financial and commodity markets, including pricing and reference data, exchange data, analytics, feeds, index services, desktops and connectivity solutions as well as corporate and ETF listing services on the cash equity exchanges of the industry players.
Here are the industry’s three major themes
- The industry continues to witness mergers and acquisitions as companies seek to evaluate opportunities to supplement their internal growth story by forging strategic alliances or acquiring businesses or technologies. These will enable them to penetrate untapped markets, provide new products or services and enhance the value of their platform and the existing trade-related operations.
- The players in the industry are largely dependent on product and service portfolios for revenues. Major services include trade execution, clearing, settlement services for securities and commodity contracts, listing services plus trading, and clearing systems services. Other revenue sources include data products, and financial indexes along with information and public company services. Maximization of transaction and clearing fees and lowering of transaction-based expenses drive profits. Sustainable trading volume growth, driven by trading volatility, fuels transaction and clearing fees (a major component of the top line of industry players). In recent years, the concerned players launched a number of innovative technologies that rely on machine-learning, automation and algorithms designed to improve trading decisions while reducing trading inefficiencies, cyber threats and human errors.
- Focus on building a strategic economic market model via technological advancements and upgrade of products and services will help all exchanges to stay afloat amid changing industry dynamics. Additionally, strategic buyouts lead to a diversified product portfolio (the primary growth catalyst) and help industry participants to maintain their domestic market share as well as fortify global footprint.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Securities and Exchanges industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #176, which places it in the bottom 30% of the 253 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, reflects unfavorable near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have been losing confidence in this group’s earnings growth potential. Evidently, the industry’s earnings estimate for the current year has moved down 1.7% in 10 weeks’ time.
Before we present a few securities and exchanges stocks worth considering for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector, Underperforms S&P 500
The Zacks Securities and Exchanges industry has outperformed the broader Zacks Finance sector but underperformed Zacks S&P 500 composite over the past year. The industry has lost 3.2% against the Zacks S&P 500’s composite gain of 5.4%. The broader sector has declined 16% in the said time frame.
One-Year Price Performance
Industry’s Current Valuation
On the basis of trailing 12-month price-to-book (P/B), which is commonly used for valuing finance stocks, the industry is currently trading at 3.12X compared with the S&P 500’s 4.32X and the sector’s 2.23X.
Over the last five years, the industry has traded as high as 3.54X, as low as 1.84X and at the median of 2.68X as the chart below shows.
Price-to-Book (P/B) Ratio (TTM)
Price-to-Book (P/B) Ratio (TTM)
Expansion of product portfolio is likely to drive the performance of industry players. Increase in trading volumes and product expansion through prudent acquisitions are expected to provide a cushion as well. Low reliance on debt is an added advantage.
However, alterations in investment patterns and priorities, intense competition with the wave of mergers and acquisitions in the stock exchange industry and compliance with regulations pose challenges.
The Zacks Securities and Exchanges space currently has just one stock sporting a Zacks Rank #1 (Strong Buy) and three stocks carrying a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
MarketAxess Holdings (MKTX - Free Report) : This New York-domiciled leading multi-dealer trading platform provides institutional investors with access to global liquidity in products like U.S. high-grade corporate bonds, emerging markets and high-yield bonds, European bonds, U.S. agency bonds, credit derivatives, and other fixed-income securities. It sports a Zacks Rank of 1.
The Zacks Consensus Estimate for 2020 EPS indicates a rise of 38.1% and nearly 5% increase for 2021 from the year-ago reported figure. It came up with a four-quarter average surprise of 1.09%.
Price and Consensus: MKTX
Nasdaq (NDAQ - Free Report) : Headquartered in New York, Nasdaq is a leading provider of trading, clearing, marketplace technology, regulatory, securities listing, information and public and private company services. It carries a Zacks Rank of 3.
The Zacks Consensus Estimate for 2020 EPS indicates a rise of 14% while that for 2021 implies 2.4% increase from the year-ago reported figure. It came up with a four-quarter average surprise of 3.13%.
Price and Consensus: NDAQ
Cboe Global Markets (CBOE - Free Report) : Based in Chicago, IL, this Zacks Rank #3 company is one of the largest stock exchange operators by volume in the United States and a leading market globally for ETP trading.
The Zacks Consensus Estimate for 2020 EPS indicates a rise of 11.4%. It came up with a four-quarter average surprise of 8.24%.
Price and Consensus: CBOE
Intercontinental Exchange (ICE - Free Report) : This Zacks Rank #3 leading global operator of regulated exchanges, clearing houses and listings venues, and a provider of data services for commodity, financial, fixed income and equity markets is based in Atlanta, GA.
The Zacks Consensus Estimate for 2020 EPS indicates a rise of 14.7% while that for 2021 projects nearly 4% increase from the year-ago reported figure. It came up with a four-quarter average surprise of 4.46%.
Price and Consensus: ICE