We recently compiled a list of the 10 Unrivaled Stocks of the Next 10 Years. In this article, we are going to take a look at where Intercontinental Exchange, Inc. (NYSE:ICE) stands against the other unrivaled stocks of the next 10 years.
Growing a business is not an easy task. Several factors come into the picture when you talk about growth. In 2019, McKinsey reported that ~50% of the companies that enjoyed healthy and stable shareholder returns but didn’t see top-line growth were either acquired or delisted. Growth is getting tougher amidst new market dynamics such as higher consumer expectations, competitive intensity, and digital disruption. Growth can only be rewarded to businesses that spot opportunities at hyper-granular levels and then seize them quickly.
Pricing Power Remains Critical, Says Legendary Investor
Warren Buffett, the billionaire CEO of Berkshire Hathaway Inc., mentioned that he tends to rate businesses based on their ability to increase prices. He pays so much attention to the pricing power that he sometimes doesn’t even consider the people who are managing the business. Buffett has had a successful career of stock picking and takeovers.
The veteran investor has bought companies in the business of railroads and electricity producers, whose pricing power comes from a dearth of competitive options available to their clients. Buffett has also built stakes in several consumer discretionary companies relying on the appeal of their brands to bring in customers.
Forecasts for 2024
Wall Street analysts expect that S&P 500 companies are expected to report steady earnings growth in 2024. They anticipate a ~5.4% earnings growth in 3Q 2024 and over ~15% earnings growth in 4Q 2024. The S&P 500’s forward price-to-earnings ratio sits at ~22.40x as of August 30. The 10-year average forward price-to-earnings ratio came at ~17.9x, suggesting that the stock valuations might be slightly stretched.
Moving forward, the US presidential election remains the most significant potential market catalyst for 2H 2024. Landsberg Bennett Private Wealth Management believes that inflation numbers might surprise to the upside towards the end of 2024 and into 2025. This is because year over year comparables might become more difficult and the effects of increased Chinese shipping rates start reflecting in the inflation data points.
Equity Market Outlook Amidst Uncertain Macro-Economic Environment
A “higher-for-longer” backdrop favoured larger and higher-quality companies that are less cyclical and rate-sensitive. Such companies were supported by mania in Artificial Intelligence/Large Language Models (AI/LLM) stocks. JPMorgan believes that, in the US equities, momentum crowding and stock market concentration reached multi-decade extremes.
Market volatility in the US remains low, with VIX averaging only ~14 for the year to July 2024. This was mainly because of fundamental and technical factors, such as rising markets, risk complacency, and lower realized correlation, among others.
In Europe and other areas, the broader equities were supported by improved economic activity and the expectation of multiple Fed cuts at the start of 2024. However, the growth-policy trade-off might worsen in 2H 2024. JPMorgan believes that “there is a risk of disappointment.” The large bank expects that the Fed might stay ‘higher-for-longer,’ US activity momentum might decelerate and there can be a softening of pricing and top-line growth. Collectively, this might hurt earnings delivery in 2H 2024. Therefore, investing in stocks with wide economic moats and companies having significant market share should help offset the losses in the remainder of 2024.
Our methodology
To list 10 unrivaled stocks of the next 10 years, we sifted through wide moat ETFs and checked online rankings. Next, we narrowed our list by filtering out the companies that have held a near-monopoly status for years or decades. Finally, we ranked the stocks in ascending order of the number of hedge funds that hold them, as of 2Q 2024
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A team of mortgage originators using a closing solution platform for quick and accurate mortgage processing.
Intercontinental Exchange, Inc. (NYSE:ICE)
Number of hedge fund holders: 70
Intercontinental Exchange, Inc. (NYSE:ICE) is a vertically integrated operator of financial exchanges and provides ancillary data products. The company operates as a large derivatives exchange, too.
Intercontinental Exchange, Inc. (NYSE:ICE), which is a near monopoly business, enjoys a strong economic moat as its businesses have economies of scale, network effects, and industry structure that are difficult to replicate. Talking about derivatives and listing, there are very limited substitutes, providing the company with a sustainable competitive advantage.
Also, Intercontinental Exchange, Inc. (NYSE:ICE) is expected to benefit from the fact that it is vertically integrated. This means that it has control over the execution and clearing of contracts. Therefore, it can exert pricing power and attract volumes. The company can also improve counterparty and systemic risk management.
Intercontinental Exchange, Inc. (NYSE:ICE) reported financial results for 2Q 2024, with consolidated net income coming at $632 million on $2.3 billion of consolidated revenues, less transaction-based expenses. Its 2Q 2024 results were driven by strong performances in energy markets and mortgage technology. Moving forward, it expects continued growth with a clear focus on leveraging its core strengths. Notably, revenue synergies and recurring revenue growth should have a significant impact in 2025 and 2026.
Analysts at Keefe, Bruyette & Woods gave an “Outperform” rating on the shares of Intercontinental Exchange, Inc. (NYSE:ICE). They provided a price target of $168.00 on 6th August. In the second quarter of 2024, 70 hedge funds were long Intercontinental Exchange, Inc. (NYSE:ICE) as per Insider Monkey’s database.
Third Point Management, a New York-based investment advisor, released its second-quarter 2024 investor letter and mentioned Intercontinental Exchange, Inc. (NYSE:ICE). Here is what the fund said:
“During Q2, we added to our position in Intercontinental Exchange, Inc. (NYSE:ICE). We originally invested in ICE in April 2023 when the FTC’s challenge to the company’s proposed acquisition of Black Knight impacted the share price. While the deal overhang has lifted, we believe a re-rating opportunity from a structural and cyclical acceleration of growth is still ahead. Importantly, we expect that AI will drive new growth opportunities across most of ICE’s businesses, extending the runway for value creation.
ICE is a collection of dominant information services and exchange assets that automate diverse and large asset classes (Energy, Mortgages, Fixed Income, Rates and Equities) while producing vast amounts of proprietary data. CEO Jeff Sprecher has led ICE for over 20 years. Under his visionary leadership, the company has compounded organic revenue and EPS at ~5% and ~15%, respectively, and adopted new modalities through organic investment and strategic acquisitions, most notably creating the flagship clusters of Energy and Mortgage, franchises we believe are of very high business quality. On the horizon, we expect an acceleration of growth to a consistent low double digit organic algorithm in these businesses, and a re-rating of the stock as price follows value creation…” (Click here to read the full text)
Overall ICE ranks 8th on our list of the unrivaled stocks of the next 10 years. While we acknowledge the potential of ICE as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than ICE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
