Following massive drops in their respective share prices, investors in contracts for difference (CFD) providerIG Index (LSE: IGG) and cybersecurity consultantNCC (LSE: NCC) will be forgiven for wanting toforget 2016.Nevertheless, I think both companiescould rebound over the medium term. Heres 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 torequiring 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 offewer clients and, ultimately, lower profits for those in the industry. That said, a drop of around 40% also experienced by IGs peer,CMC Markets felt like an over-reaction, particularly as the formerstated its general support for the FCAs proposals.
Having recovered slightly since Decembers fall, IGs shares trade on a price-to-earnings (P/E) ratio of 11for 2017. For a quality operator capable of generating consistently high returns on capital and exceptionaloperating margins, I think thisrepresentsa real bargainfor investors, especially as theshares 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-evaluatethe 1.9bn cap market leaders shares.
While the situation plays out, investors can capture a stonking, sufficiently-coveredyield of 6.2% over six times what you would get from the best instant access cash ISA.
Although for completely different reasons, the plungein NCCs share price was on par with that experienced by IG. In October, the company informed the market ofthree major contracts beingcancelled and issues surrounding services contract renewals. Investors duly jettisoned the stock from their portfolios, despite the company seeking to reassure holdersthat 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 thecompany releases its interim results next Thursday.
Thanks tonew European rules forcing companies to take further steps to keep data secure, however, Im confidentthat shares in NCC will eventually recover their lost form. Longer term, the exponential growth expected inthe cyber-security sector should see more businesses call on itsservices and investors buying itsstock. Lets 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 theManchester-based business still trade on a rather highP/E of 20 at the time of writing. Thats 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 tankedjust 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.