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Takeaway: We added CME to Investing Ideas on the long side on 3/24.

Stock Report: CME Group (CME) - HE CME table 4 1 16


We recently completed a granular, deep dive study demonstrating that all classes of volatility including equity, fixed income, and FX have been managed lower by a U.S. Central Bank engineering a historically abnormal quantitative easing policy over the past 7 years.

What does this mean and what are the implications? Well, with Quantitative Easing over (for now) and the Federal Reserve on a rate hiking policy path (for now), for the first time in a long time there is a reason to hedge bond and equity exposure. CME is one of the few venues that allows both institutional and retail investors to do exactly that. The company manages the entire Treasury futures curve and also most of the equity index futures in the U.S.


In this late cycle economic environment, CME Group (CME) has a solid earnings trajectory. The exchange continues to benefit from all 3 legs of the exchange stool including incremental volatility; incremental participants coming into its markets; and also new product introduction. Over the course of the next 12 months, we think the earnings opportunity will jump and the path to more than $5 per share in earnings will become more obvious. (Note: Our earnings target is over +15% ahead of the Street.)

Along the way, CME should continue to issue its variable year-end dividend of up to $1 billion (near $3 per share or a 3.1% yield on this distribution alone). In an environment that has entered into an earnings recession (2 consecutive quarters of negative Y/Y earnings results for the S&P 500), the exchange's results are accelerating to the upside. This large cap company currently sits on our Best Ideas list as a Long with solid earnings growth and a defensive business that thrives on incremental volatility across asset classes.


There looks to be a forming secular case that energy hedging from a commercial standpoint is receding as, historically, E&P enterprises have not hedged at low commodity prices. This is showing up in lower energy trader counts in the CFTC bi-monthly data. Conversely, financial traders counts are growing and what was a “lost decade” in financial activity (from 2000-2010 during the Financial Crisis) should be a boon for fixed income and equity hedging, which benefits CME. Thus, from a secular standpoint the more financially oriented CME will outflank the more energy dependent Intercontinental Exchange from an activity and trader growth stand point.


Stock Report: CME Group (CME) - HE CME chart 4 1 16