Bull of the Day: CME Group (CME)

CME Group, a Zacks Rank #1 (Strong Buy), is the world’s leading and most diverse derivatives marketplace. CME Group operates contract markets for the trading of futures and options worldwide. The company offers derivatives products based on interest rates, equities, foreign exchange, commodities, and fixed income through its electronic trading platforms.

The stock is displaying relative strength and has been making a series of 52-week highs this year. Shares have held up extremely well through the recent market volatility. Increasing volume has attracted investor attention as buying pressure accumulates in this top-ranked stock.

This year’s market action has witnessed a notable rotation in industry strength. It’s our job to identify that rotation and position our portfolios to benefit from it.

CME Group is part of the Zacks Securities and Exchanges industry group, which currently ranks in the top 15% out of more than 250 industries. Because this group is ranked in the top half of all Zacks Ranked Industries, we expect it to outperform the market over the next 3 to 6 months, just as it has so far this year:

Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.

It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market. By focusing on leading stocks within the top industries, we can dramatically improve our stock-picking success.

Company Description

In addition to its operation of contract markets for the trading of derivatives, the Chicago, Illinois-based company provides clearing house services including clearing, settling, and guaranteeing of futures, options, and cleared swaps products through its exchanges. CME Group also provides trade processing and risk mitigation services.

The exchange offers a range of market data services including real-time and historical data. CME Group serves professional traders, financial institutions, corporations, governments and central banks. The company witnessed record activity in its cryptocurrency derivatives markets during the first quarter of the year, driven by micro-sized contracts.

CME Group boasts a strong market position driven by its diverse product line and numerous strategic alliances. Fundamental growth remains a key driver for the company’s operating leverage, as CME leads with about 90% market share of global futures trading and clearing services. While higher electronic trading volume adds scalability, product innovation and a growing proportion of volume from customers outside the United States have been driving results.

Earnings Trends and Future Estimates

CME Group CME boasts a long history of surpassing earnings estimates. The company most recently delivered fourth-quarter earnings back in February of $2.52 per share, which represented a 3.28% surprise over the Zacks Consensus Estimate.

CME has delivered a trailing four-quarter average surprise of 2.2%. Consistently beating earnings estimates is a recipe for success.

Analysts covering CME have upped their current-quarter EPS estimates by 5.84% in the past 60 days. The Zacks Consensus Estimate now stands at $2.72 per share, translating to growth of 8.8% relative to the year-ago period.

What the Zacks Model Reveals

The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently witnessed positive earnings estimate revision activity. This more recent information can be a better predictor for future earnings and can give investors a leg up during earnings season.

The technique has proven to be quite useful for finding positive earnings surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year back test.

CME Group is a Zacks Rank #1 (Strong Buy) and boasts a +3.87% Earnings ESP. Another beat may be in the cards when the company reports Q1 results on April 23^rd.

Let’s Get Technical

This market leader has seen its stock advance more than 11% already this year, all while the general market remains in a correction. Only stocks that are in extremely powerful uptrends are able to experience this type of outperformance. This is the kind of stock we want to include in our portfolio – one that is trending well and receiving positive earnings estimate revisions.

Notice how both the 50-day (blue line) and 200-day (red line) moving averages are sloping up. The stock has been making a series of higher highs throughout the past year. With both strong fundamental and technical indicators, CME stock is poised to continue its outperformance.

Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. As we know, CME Group has recently witnessed positive revisions. As long as this trend remains intact (and CME continues to deliver earnings beats), the stock will likely continue its bullish run.

Bottom Line

Backed by a leading industry group and history of earnings beats, it’s not difficult to see why CME stock is a compelling investment. Robust fundamentals combined with an appealing technical trend certainly justify adding shares to the mix.

CME is ranked favorably by our Zacks Momentum Style Score with a top ‘A’ rating. This indicates that shares are likely to move higher based on momentum in earnings and sales trends along with price performance.

Recent positive earnings estimate revisions should also serve to create a ‘floor’ in terms of any sudden or unexpected downside moves. If you haven’t already done so, be sure to put CME on your shortlist.

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This article originally published on Zacks Investment Research (zacks.com).

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