- CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action.
Recent bullish divergence has been observed; +1
- ANALYSTS- read analyst reports but come to your own conclusions.
4 strong buy, 4 buy, 9 hold (according to CNBC); +1
- INSIDERS- if the people that know the company the best are not buying it, why should you?
One director purchased 2000 shares on 4/27 at $274 as well as 400 on 3/14 at $275; +1
- MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers. If all three of them can agree on the verbiage, it’s passed a big hurdle. Read it carefully. Pay particular attention to the Risks, Litigation, and Related Transaction sections. These are the things you will wish you had taken the time to read if something goes bad with your investment.
CME is employing a globalization strategy by attempting to initiate partnerships with exchanges in foreign markets allowing their customers to access their products in those markets with less difficulty. Arrangements have been created in Brazil, Korea, India, Japan, Malaysia, UAE, South Africa, Singapore, and Mexico with the continuing efforts to try and integrate into all world markets. CME believes that they can take advantage of the growth in these markets and translate it to their own growth. They are also trying to create increased specialization in the management of existing customers to avoid overlap. Financials and margins are phenomenal with operating margins in excess of 60% over the last three years. Deleveraging in Europe may lead to declines in trading as companies try to contract their balance sheets in order to meet regulatory requirements. This along with stiff competition in the exchange market could have a negative impact on CME. With Dodd-Frank legislation starting to be finalized and the impact of the bill still unforeseen, it could leave CME exposed to regulatory hurdles; 0
- RELATIVE PERFORMANCE- If the stock has a superior relative performance to the market in the short term
Consistently underperformed the S&P 500 since November 2011; -1
- SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience
With recent volume declines and the persistency of market fear many investors are still keeping their money out of the market; -1
- CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.
Cash flows are one of the strongest components of CME’s financials as they have been able to create more than $1 billion in cash each of the last 4 years from their operating activities. They have raised dividends for 2012 with a predicted yield of about 4.5% when taking into account a $3/share variable annual dividend along with the quarterly $2.23/share dividend. CME also maintains that even though they are returning so much in dividends it does not indicate that their growth is starting to decline. Investor relations have indicated that because cash flow is so strong that they are still able to reinvest large amounts of cash into the business; +1
- PEG RATIO- it’s good to find a company growing faster than it’s multiple.
1.57 (according to Yahoo! Finance); -1
- VALUATION- contrary to popular opinion, it does matter what you pay for a company. Check its discounted cash flow value. Buy it for less than what it’s worth, a 1, less a -1, about the same 0.
Along with the strong dividend yield the stock price also has the potential to increase by more than 41% over the coming years according to our valuation; +1
- CATALYST- what’s going to change the status quo?+1
According to investor relations, the company has seen a recent dip in the stock due to fear that CME may be designated as a “systemic utility” which essentially means that they are systemically important and if they were to fail then they would have a large impact on the entire market. Because of this they will be exposed to more stringent regulation regarding liquidity requirements. Systematically important financial market utilities will need to have more collateral on hand. We talked to IR and they don’t believe they will be required to post more collateral as they are already regulated by CFTC and have sufficient oversight. If they were to be required to have more collateral, it’s hard to imagine them not being able to sell a stake in the company at an attractive valuation to one of their foreign exchange partners. The CEO Gill has been traveling regularly to China once or twice per month so this might be both a catalyst and a source of future funds. This will all be resolved one way or the other and fairly soon so at these prices, it will be a positive.