5. CME Group Inc. (NASDAQ:CME)
Number of Hedge Fund Holders: 60
Prevatt Capital’s Stake: $23,681,900
CME Group Inc. (NASDAQ:CME) is featured in fifth place on our list of top stock picks of Prevatt Capital. The firm owns and runs a derivatives marketplace. CME Group Inc. (NASDAQ:CME) represents nearly 8% of the total stock portfolio of Prevatt. The hedge fund first bought stakes in the firm during the last three months of 2024. No changes were made to this stake in the first three months of the new year. CME Group Inc. (NASDAQ:CME) is an industry-leading brand with consistent earnings growth, yet it has a Price-to-Earnings (PE) ratio of only 24, placing it firmly among the top value stocks in the derivatives world.
CME Group Inc. (NASDAQ:CME) is also an efficiently-run company. It has an EBITDA margin of 65% and a ROE of nearly 10%. The dividend yield of the stock is also impressive at around 2.6%. In addition to these numbers, the financial health of the stock is evidenced by positive free cash flows, positive operating income, positive net income, and exceptional revenue growth figures over the past three years. Many analysts on Wall Street expect investors to wake up to these realities, forecasting a steady rise in the stock’s price in the next twelve months. The average price target on Wall Street for the stock is $232.
In its Q1 2024 investor letter, Cooper Investors, an asset management firm, highlighted a few stocks and CME Group Inc. (NASDAQ:CME) was one of them. Here is what the fund said:
“A company that welcomes uncertainty is CME Group Inc. (NASDAQ:CME), a Stalwart in which we recently reinitiated a position, having successfully invested historically. Value latency has re-emerged with the shares materially underperforming over the last five years.
As the largest derivatives exchange globally, CME offers leading liquidity pools to risk managers across multiple asset classes including equities, interest rates, FX, energy and agricultural commodities. The management culture at CME exemplifies the pragmatic, no-nonsense Midwest attitude that we admire of Chicagoans – no coincidence that the portfolio owns five Chicago-based companies today. This was reinforced in a recent meeting with newly appointed CFO Lynne Fitzpatrick. CME know what they are and what they’re not, with a solid track record throughout market fads and blow-ups. The story of CEO Terry Duffy calling out Sam Bankman-Fried as ‘an absolute fraud’ (at the time he was lauded across the land as a visionary genius) is one recent example of their nose for risk.
We see several avenues for CME to grow earnings and cash flows today, irrespective of market volatility, as well as continuing to pay a special dividend implying a yield of ~4-5%. The business rarely changes hands as cheaply as it does today, trading at an average market multiple versus typically trading at a 30-60% premium. With this business routinely generating over 50% returns on invested capital and carrying no debt today, CME is far from an average business.”
