I sure hope you followed the advice I gave you back on March 26.
That’s the day I told you about a breakout tech leader that gives us a strong hook on the massive trading in bonds.
I noted that the bond market was about to get much more active as investors sought safe havens from trade tensions and actions by the Fed that have a huge impact on the markets.
Even without those drivers in place, the fixed-income field is huge. Consider that its average daily volume is three times that of the stock market and comes in at about $700 billion on a “calm day.”
I went on to cite several reasons why MarketAxess Holdings Inc. (NasdaqGS:MKTX) could double in value in five years.
Turns out that was far too conservative. From the day we had that chat, the stock has advanced more than 60%, beating the broad market by 1,500%.
Don’t worry. I still see plenty of upside ahead now that the firm has a made a bold move that will give us a huge new catalyst…
Now then, you may recall that MarketAxess ranks as the premier high-tech firm serving the bond market, giving it a lot of room to grow.
For instance, this fast moving tech leader right now handles 95% of all electronic bond deals. But that is still less than 20% of all these trades made today.
The bond market is only just now really moving into full digital transactions since most trades occur directly between houses. That gives MarketAxess a long runway to ride a disruptive digital wave.
And remember, even though the Fed just cut rates again and they remain historically low, trading volume for bonds and other fixed-income assets continues to grow.
This year that figure is nearly $40 trillion, up more than 50% in less than a decade. And that’s just in the U.S.
So, let’s take a look at the rest of the world. Doing so gives us an addressable of $100 trillion. In contrast, Dow Jones Indices suggest the total global stock market at roughly $64 trillion.
That’s why I’m happy to report that MarketAxess just expanded its market reach. It did so by spending $150 million to acquire LiquidityEdge.
The acquired firm has a platform for trading U.S. government Treasurys and controls about 5% of that market. As small as its market slice may sound, LiquidityEdge gives MarketAxess a great entry into a big space.
Just look at the data from the Securities Industry and Financial Markets trade group. It says that in the Treasurys market, roughly $589 billion worth of bonds are traded each day.
That’s just shy of 25 times the volume in the market for U.S. investment-grade corporate bonds.
Here’s why I think this is such a savvy move for MarketAxess. It’s a bolt-on buyout that greatly expands its market reach for very little money.
And I believe that with its cutting-edge trading tools, the firm can easily double to 10% the trades the combined firm will do in Treasurys.
See, LiquidityEdge is basically a startup having begun operations in 2015. In that context, its 5% market share in just four years is nothing to sneeze at – it handles $25 billion in trades a day.
Analysts note that LiquidityEdge provides a range of sophisticated trading options. It heavily targets an approach that lets investors receive and trade on streaming bond prices from the firms they hand pick with whom to do business.
I think this is a great merger that opens up a new burst of growth for MarketAxess.
Then again, I’m placing a lot of confidence in the company’s visionary CEO and founder Richard M. McVey. He’s second to no one in the fixed income market.
McVey launched the firm in 2,000 after a distinguished career on Wall Street, most notably at JP Morgan Chase & Co. (NYSE:JPM). He spent four years beginning in 1992 serving as managing director and Morgan’s North American futures and options business.
He then served as head of North American fixed income sales and institutional client relations. McVey was recently selected as an inaugural member of the Fixed Income Market Structure Advisory Committee for the U.S. Security and Exchange Commission.
Last Janauary, the CEO moved to strengthen his senior team. He named Chris Concannon as president and chief operating officer.
Concannon has a masters in business as well as a law degree. He’s had stints at Nasdaq, Instinet, and Cboe Global Markets, one of the world’s largest exchange holding companies.
MarketAxess now counts more than 1,600 active clients, up 10% in the last year. But that’s just a part of the growth story here as it masters the fine art of the upsell.
It now boasts 800 active international clients, a figure that is up 26% from a year ago. And the number of customers who trade in emerging markets as climbed 17% in the past year to 1,158.
Make no mistake. MarketAxess has very strong fundamentals. With a $14 billion market cap, it has 48.5% operating margins and a 30% return on stockholders equity.
This is a company with nearly $367 million in cash and debt of just $89 million. It could pay off its debt from free cash flow in less than eight months.
Over the past three years, it has grown per-share earnings by an average of 19%, nearly twice that of its sales growth.
So, I’m now forecasting another 60% gain from here in roughly the next three years.
In other words, I still firmly believe this is the kind of stock you can hold as a foundational play for many years to come.
That way we can steadily turn whatever happens with the Fed and the impact it has on the corporate and government bonds to our long-term profitable advantage.
Cheers and good investing,
Michael A. Robinson