Following massive drops in their respective share prices, investors in contracts for difference (CFD) provider IG Index(LSE: IGG) and cybersecurity consultant NCC(LSE: NCC) will be forgiven for wanting to forget 2016. Nevertheless, I think both companies could rebound over the medium term. Here's why.
Back in December, the Financial Conduct Authority (FCA) announced its plan to implement new rules to raise standards across the CFD and spreadbetting industry. In addition to requiring customers to have more money in their accounts in order to trade, the FCA also suggested that firms disclose their average client profit/loss, use standardised risk warnings and prohibit bonus promotions.
Clearly, a development such as this was never going to be warmly received by the market. More restrictions increase the possibility of fewer clients and, ultimately, lower profits for those in the industry. That said, a drop of around 40% -- also experienced by IG's peer,CMC Markets -- felt like an over-reaction, particularly as the former stated its general support for the FCA's proposals.
Having recovered slightly since December's fall, IG's shares trade on a price-to-earnings (P/E) ratio of 11 for 2017. For a quality operator capable of generating consistently high returns on capital and exceptional operating margins, I think this represents a real bargain for investors, especially as the shares could re-rate sharply if the FCA is willing to listen to alternative ideas from major players in the industry. Indeed, IG has already suggested that a tool such as limited risk trading -- which prevent a client from losing more than their initial deposit -- could be a better solution than reducing the leverage available to customers. If this idea gains traction, expect the market to re-evaluate the £1.9bn cap market leader's shares.
While the situation plays out, investors can capture a stonking, sufficiently-covered yield of 6.2% - over six times what you would get from the best instant access cash ISA.
Although for completely different reasons, the plunge in NCC's share price was on par with that experienced by IG. In October, the company informed the market of three major contracts being cancelled and issues surrounding services contract renewals. Investors duly jettisoned the stock from their portfolios, despite the company seeking to reassure holders that profits would still be in line with expectations, albeit "more biased towards the second half of the year than initially expected". While the near-term outlook looks uncertain, we should hopefully get a clearer picture of things when the company releases its interim results next Thursday.
Thanks to new European rules forcing companies to take further steps to keep data secure, however, I'm confident that shares in NCC will eventually recover their lost form. Longer term, the exponential growth expected in the cyber-security sector should see more businesses call on its services and investors buying its stock. Let's not forget that this company was also priced to perfection following year after year of earnings growth. Any disappointment was always likely to be punished by the market.
Even so, I appreciate that shares in the Manchester-based business still trade on a rather high P/E of 20 at the time of writing. That's understandably a lot more than some investors will be willing to pay. Nevertheless, those with long investing horizons and higher risk appetites may wish to take a position.
Of course, nothing is guaranteed in investing. Sometimes, shares that have tanked just keep on falling. That's why it's so important to thoroughly research any company you're thinking of buying and assess whether your tolerance for risk is sufficiently high to endure the bumpy road ahead. Buying blind can be a costly mistake.
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Paul Summers has no position in any shares mentioned. The Motley Fool UK owns shares of NCC. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.