With corporations’ bond offerings hitting record levels , many professional traders working from home, and signs that Americans are becoming more interested in trading assets, now is a good time to buy MarketAxess (NASDAQ:MKTX) stock.
MarketAxess owns and operates “an electronic trading platform” that enables individuals and firms “to trade corporate bonds and other types of fixed-income instruments worldwide.” In addition to corporate bonds, MarketAxess facilitates the trading of taxable municipal bonds, credit default swaps, emerging-market bonds, and eurobonds.
It wasn’t always so easy for individuals or even small firms to trade individual bonds. Before 2008, they could do so over the phone through large investment banks. But rule changes in the wake of the financial crisis increased the fees that such banks had to pay to trade securities. As a result, a few electronic trading websites, including MarketAxess, Bloomberg, and Tradeweb (NASDAQ:TW) filled the void.
Filling that void has become pretty lucrative for MarketAxess. The company has attracted some huge customers, including BlackRock (NYSE:BLK) and Legal & General (OTCMKTS:LGGNY). Over the last 12 months, MarketAxess generated over $227 million of net income and nearly $556 million of revenue.
I find MarketAxess intriguing on a personal level. That’s because I’ve long been very curious about trading individual bonds, but I never knew how to do so.
I liked the idea of speculating in the bonds of troubled European countries in the 2011-2013 period, and around a year ago, I thought General Electric’s (NYSE:GE) bonds would make a good investment. And for years, I believed that the bonds of certain blue-chip companies like IBM (NYSE:IBM) and McDonald’s (NYSE:MCD) would be a good way to generate meaningful, safe income during periods of low interest rates.
Since I learned about MarketAxess earlier this month, I’ve thought its business model was very promising. After all, I can’t be the only one who’s interested in buying individual bonds but never found a way to do so.
And after I read through the transcript of the company’s last earnings conference call, held on April 29, and thought more about the company’s positive drivers, I became quite bullish on its outlook.
During the conference call, MarketAxess noted that overall daily bond trading had jumped around 25% in the last five weeks of the first quarter as the coronavirus crisis began in the U.S. The high volume was partly triggered by companies’ rush to issue new bonds in order to bolster their cash during the crisis.
According to MarketAxess, “a record $480 billion of new high-grade debt” was issued in the quarter. That trend should continue as firms, particularly large companies that could still face some difficult times ahead, will likely issue a tremendous amount of bonds going forward.
Another trend that should continue, at least to a certain extent, is the work-from-home movement. On its conference call, MarketAxess said that more than 10,000 individual traders used its system during the crisis, including many who were working from home. With some traders who had used their companies’ trading systems unable to do so because they’re working from home, MarketAxess is very likely to continue to benefit from the work-from-home trend.
Meanwhile, there’s evidence that Americans’ interest in trading securities has surged during the pandemic. For the first time in my memory, millennials appear to be getting involved in trading stocks on a large scale, and for the first time I can remember, retail investors have become very interested in trading the stocks of bankrupt companies.
And MarketAxess does not really have very tough competition. According to The Economist, its main competitors are Bloomberg and TradeWeb. But Bloomberg’s terminal costs an (for many people and companies) exorbitant $24,000 per year, so MarketAxess only has one real competitor when it comes to attracting most individual investors and many small firms.
MarketAxess’ first-quarter results show that it was able to effectively exploit the positive trends I described above. Its trading volume soared 29% year-over-year to $660 billion, and its operating income jumped 44% YOY.
The Bottom Line on MKTX Stock
The shares aren’t cheap; they’re trading at a forward price-earnings ratio, based on analysts’ average 2020 earnings per share estimate, of nearly 75. Still, given the company’s powerful growth in Q1 and its many positive catalysts, I think the shares will outperform the market over the medium-term and the long-term.
As of this writing, Larry Ramer owned shares of GE. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer.