The stock market is one of the few places where there is less demand when prices get cheaper. That's because investors often fear that if prices are dropping, they will just fall more. That's a legitimate concern. Almost no one has demonstrated an ability to consistently time the market. However, sell-offs can be great opportunities for long-term investors.
Buying shares of proven companies when the market sours on their prospects is one of the easiest ways to build wealth. That's assuming they recover. MarketAxess (MKTX 3.36%) could offer that opportunity right now. It was one of the best-performing stocks of the 2010s, climbing 3,065% over the decade. Recently, fears of slowing growth have sent the stock down 23% from all-time highs. Investors who can see through the dark clouds should take advantage and add shares to their portfolios.
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A strong position in an enormous market
MarketAxess is the largest electronic trading platform in the $128 trillion global bond market. The company claims more than 1,800 active institutional investor and dealer firms as clients. Its platform facilitates trading in four product categories: U.S. high-grade and high-yield, emerging markets, and eurobonds. For now, the company is especially reliant on one category. In the first quarter of 2021, nearly half of the $244 billion in transaction volume was in U.S. high-grade bonds.
Management estimates the average daily volume for its addressable credit markets and U.S. Treasury markets at $79 billion and $589 billion, respectively. It believes that translates to an annual revenue opportunity of about $5 billion. Over the next decade, it expects that opportunity to grow to $8.5 billion. For context, revenue over the past 12 months was just $716 million. That leaves a lot of room for sales growth, and even more for profits to expand as the company scales.
A rare combination of financial characteristics
The company offers a combination of growth and profitability that isn't easy to find, especially in a dividend payer. Sales have grown consistently, posting five- and 10-year averages near 17%. Profitability has also steadily increased over the past decade. This means a higher percentage of sales is dropping to the bottom line as more trading is conducted on the platform. Gross margins and operating margins have each expanded 1,000 basis points (10 percentage points) since 2011.
Management has also demonstrated it knows how to allocate capital. Its return on invested capital -- the net operating profit after taxes divided by debt plus equity -- has climbed from a respectable 17% in 2011 to 31% in recent years. That's better than Facebook, Alphabet, and Amazon.
It has also paid a dividend since 2009 and steadily increased it every year since. What began as a $0.07 per-share quarterly payout has increased almost tenfold to $0.66 per share. The stock currently yields about 0.6%.
A reasonable valuation
Few investors would call shares of MarketAxess cheap. That said, they haven't been this inexpensive in a while. Despite trading as high as 90 times earnings and 35 times sales over the past two years, those ratios now stand near the lowest levels of that 24-month period.
MKTX PE Ratio data by YCharts
That type of multiple contraction is typically associated with a slowdown in growth, and that's the case here. Analysts expect the company to grow sales and earnings just 11% and 1% this year, respectively. Both of those numbers are well below the five-year averages of 18% and 25%. The slowdown is unlikely to last. The two biggest drivers of growth -- municipal bonds and international expansion -- outpaced the overall business in the most recent quarter. Growth in municipal bonds came in at 75%, while revenue for the international segment jumped 18%.
MarketAxess is a leader in electronic trading of fixed-income assets, a market still in the early stages of adopting technology. Unlike most other stocks, it offers a trifecta of growth, profitability, and yield. Add in multiples of sales and earnings that are near the lows reached in March 2020, and the stock is a good candidate to produce market-beating returns going forward. Those are the primary reasons I'll be adding to my position as soon as trading rules allow.
