Financial Sector Ideas

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CME Group - >>> 2 Top Financial Services Stocks to Buy in October


Motley Fool

By Courtney Carlsen

Oct 7, 2023


https://www.fool.com/investing/2023/10/07/2-top-financial-services-stocks-to-buy-in-october/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article


KEY POINTS

Financial markets rely on a multitude of companies to grow and evolve.

CME Group is the top derivatives exchange operator and benefits from volatile markets.

FactSet Research's trove of data helps investment professionals and provides recurring subscription revenue.

These finance companies have strong moats and are cash-generating machines.

Financial services companies form the backbone of markets, offering solutions from exchanges where market participants can buy or sell assets to data providers who help investment professionals make sense of troves of data. Companies that provide these crucial services can make solid investments because of their steady cash flows and ability to profit in different market conditions.

CME Group (CME 0.15%) and FactSet Research Systems (FDS 0.43%) are two stocks with excellent businesses. These companies have strong competitive advantages and favorable trends that benefit their business.

Here's why investors should consider buying these two stocks today.

CME Group dominates derivatives and has seen robust demand

CME Group operates a financial exchange that allows investors to buy and sell derivatives, which are financial instruments that get their value from some underlying asset, like stocks or bonds. Derivative contracts include futures, forwards, and options traded on CME Group-owned exchanges, including the Chicago Mercantile Exchange, Chicago Board of Trade, and New York Mercantile Exchange.

CME Group is the world's largest operator of derivatives exchanges and has a strong moat, or competitive advantage, due to its dominant position. The company acts as a clearinghouse for all trades on its exchanges and earns clearing fees in return for guaranteeing these contracts will be honored.

Last year was solid for the exchange operator. Volatility was ever-present in financial markets, driving robust demand for derivative products. In 2022, CME Group's average daily volume was $23 million, boosting clearing and transaction fees, which increased 10%.

Moving forward, CME Group should continue benefiting from volatile bond and stock markets. Interest rates have been especially volatile, with the 10-year Treasury bond reaching its highest yield since 2007. This year, CME Group's revenue has grown 8%. Robust trading activity continued in the third quarter, and its average daily volume of 22.3 million contracts was its second-highest third-quarter volume ever.

CME Group has a strong moat and dominates the global derivatives market. Its earnings can fluctuate based on volume. However, as the top derivatives exchange operator, its business has steady demand. As volatile market conditions persist, participants will continue to look to derivatives to protect themselves from stock and bond volatility, making CME Group a solid buy this October.

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