Shares of online trading firm CMCX Markets (LSE: CMCX) rose by 8% in early deals on Thursday morning. These gains followed an upbeat trading statement confirming that operating profit for the year ending 31 March should be "significantly above the prior year."
Shares of firms offering spread betting and contracts for difference (CFD) have been under pressure over the last 15 months, due to planned regulatory changes. These will limit the amount of leverage available to retail customers. These changes were confirmed by the European regulator ESMA earlier this week and the UK's FCA has previously said it would follow the ESMA rules.
The changes will mean customers have to place much larger deposits, or 'margin ' payments. This is likely to force some customers to trade in smaller sizes, resulting in smaller profits and losses. This is expected to reduce revenue for companies such as CMC.
In a statement earlier this week, CMC said it expected the changes "to have an impact on how clients trade." However, the firm said it was not yet possible to calculate the likely impact on revenue and profit.
CMC's focus on high value clients may limit the impact of these changes, which won't apply to traders who qualify as professionals. The group is also diversifying by launching a stockbroking operation with ANZ Bank in Australia.
Although the outlook for profit in 2019 is still uncertain, I think that CMC's valuation reflects this. The shares currently trade on around 13 times 2019 forecast earnings, with a prospective yield of 4.9%. As one of the UK's top players in this sector, I think it should continue to prosper and is still worth buying.
A controversial choice
One of the most hotly-debated UK stocks operating in this sector is Israel-based Plus500 (LSE: PLUS).
This AIM-listed firm's shares have risen tenfold since its flotation in 2013. But it's been a wild ride for shareholders, as this period has included a regulatory investigation and attempts by short sellers to discredit the stock.
Although I own shares in Plus500, I'm concerned about why it's so much more profitable than rivals such as CMC Markets. In 2017, it generated an operating margin of 59%. The equivalent figure for CMC was about 30%.
One of the main differences between the firms seems to be that Plus500 has a greater focus on retail traders. In 2017 profits received a big boost from trading in cryptocurrencies such as bitcoin -- an area many professional traders avoided.
What's next for this 10-bagger?
If you follow this firm, you may have noticed that several founder shareholders have sold some of their shares in recent months. Hedge fund manager Crispin Odey has also been a big seller, reducing his funds' position from more than 20% to 12%.
However, the reality for big shareholders is that they have to sell while the shares are still rising. Selling into a falling market is often impossible. And it's not unusual for founders to want to diversify their investments.
These sales could be a sign that this business is maturing, but I don't think they necessarily mean that the stock is overpriced.
Plus500 shares currently trades on about 7 times forecast earnings, with a well-covered dividend yield of 7.8%. The company's past performance suggests to me that these figures are probably realistic. I think these shares could still be a profitable investment.
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Roland Head owns shares of Plus500. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.