As a group, baby boomers have accumulated a lot of wealth. With the average baby boomer predicted to retire with $500,000 and $1 million in assets, this group is estimated to have $7 trillion in wealth, which accounts for nearly 70% of the total wealth in the United States.
Most of the individual clients I counsel fall into this demographic. My typical new client is a male baby boomer with most of his accumulated assets invested into a former employer’s 401k, IRAs and his home equity. He’s invested in stocks to save for retirement, but now he is concerned with making these assets last for the rest of his life.
He is well aware his investments are the key to his retirement, but he is afraid to make a mistake with them. He’s lived through the 1987 Black Mondaystock market crash, the dot-com bust and the most recent subprime mortgage crisis. Some of these boomers have an inheritance coming from parents, but they are also concerned about their aging parents’ long-term care. They may also be paying off their kids’ college loans, which makes them concerned about not having enough funds to cover all their expenses. It’s no wonder they have been increasingly becoming more risk-averse.
So as they get closer to retirement, they’ve been shifting toward low-risk investments. Many have already begun shifting their portfolios from stocks to fixed-income securities, a trend that’s likely to continue for many years to come.
And there is one particular stock poised to explode as boomers become more conservative with their investments — MarketAxess Holdings Inc.(NASDAQ:MKTX).
The company operates an electronic-trading platform that allows investment professionals to trade corporate bonds and other types of fixed-income instruments. It has more than 900 active institutional investor clients and a market share of 12.5%. Through its proprietary Corporate Bondticker service, MarketAxess provides fixed-income market data, analytics and compliance tools that help its clients make trading decisions.
Another trend that will greatly benefit MarketAxess’ top line is the recent popularity of corporate bonds over sovereign debt. As countries’ financial positions and debt ratings continue to worsen and as corporations improve their impressive liquidity, institutional investors are likely to flock to corporate bonds to get higher yields with less risk.
MarketAxess also has an unusually secure financial position for a company of only $1.15 billion market cap. The company has strong, consistent free cash flow and zero debt. Since 2009, it’s been paying a quarterly dividend of 11 cents a share and it recently announced a special dividend of $1.30 a share scheduled for Dec. 27. The company has more than $150 million in cash it can use to purchase other electronic-trading companies and increase its market share.
Although there isn’t much revenue growth right now, it is still consistent and the company enjoys an average operating margin of 44%. Another strong indicator of the company’s compelling position is the fact that 97% of the stock’s float is owned by mutual funds and institutional investors.
Take a look at MarketAxxess since 2008 when the first baby boomers started to retire:
Why MarketAxess looks like a great buy
MarketAxess is quietly becoming the largest liquidity pool for fixed-income trading, so I would anticipate its market share could go from the current 12.5% to as high as 20% as acceleration gains steam. I also like its high fixed-fee income stream, which should help the company if revenue declines due to less trading volume. Finally, the stock is attractively priced compared to competitors. Its price-to-earnings/growth (PEG) ratio is 1.37, below the industry average of 1.53 and sector average of 5.70. Moreover, its year-over-year revenue growth of 10.5% is the highest within its investment market operators industry.
Risks to Consider: Overall trading volume of high-grade U.S. corporate bonds decreased every year from 2003 through 2008 prior to the major shift in baby boomers retiring. This decreased MarketAxxess’ market. However, corporate-bond trading volume increased dramatically in 2009 because of many factors including constrained bank lending, fewer asset-backed securities being issued and larger volumes of outstanding corporate bonds. If trading volume slips back, then it could hurt MarketAxxess’ profitability. Also, its European exposure could negatively affect earnings if there is further decline in the revenue coming from Europe.
Action to Take –> That being said, the trend has been very favorable for MarketAxess and I expect it to continue. Buy MarketAxess up to $36 a share. It is a strong pick for any long-term investor who is looking for a safe dividend-paying investment with the potential for long-term growth.
