A stellar performance stock to please both - hypergrowth aficionados and stock market bears

In the recent tumultuous market, many stocks usually deemed defensive have struggled. Since its peak on July 27, 2023, the S&P 500 ETF Trust (SPY) declined until late October, only to move up sharply since then, led by tech stocks.

Typically, utilities and consumer staples sectors are resilient during downturns, but this time, they've faltered.

The Utilities sector, represented by the Utilities Select Sector SPDR ETF (XLU), fell more than 10% until late October due to rising interest rates, which heavily impact this low-growth, high-yield sector.

Consumer Staples, tracked by the Consumer Staples Select Sector SPDR ETF (XLP), also declined by more than 10 % over the same period. Concerns over new weight loss drugs potentially affecting consumer habits, impacting companies like Coca-Cola and Hershey, contributed to this downturn.

CBOE Global Markets (BATS: CBOE)

Investors seeking low-risk options might consider diversifying with a different type of defensive stock. This stock prospers during market downturns and upswings and only suffers during boring stock market times with low volatility and trading volume.

CBOE Global Markets (BATS: CBOE) has emerged as a strong contender, increasing about 30 % in the last 52 weeks. CBOE is trading at around 180 USD and has just made a 52-week high today (November 27, 2023).

CBOE, an exchange operator in various regions and asset classes, has been a stalwart since its inception in 1973. It's the largest options exchange and holds a significant market share. CBOE's diverse revenue streams include North American Equities, European and Asia Pacific segments, Futures, and Global FX.

CBOE's competitive advantage lies in its proprietary products like SPX and VIX options and futures. With licensing agreements for exclusive trading rights of certain S&P indexes, CBOE's transaction and clearing fees are primarily driven by these exclusive products.

CBOE's business model is inherently defensive, benefiting from increased trading volumes during periods of economic stress and investment euphoria. Historical beta analysis shows that CBOE's stock tends to be less volatile than the broader market.

A history of outperformance

Since going public, CBOE has yielded impressive shareholder returns, outperforming its peers and the S&P 500. Its strong financial performance, driven by significant revenue and net income growth, has been augmented by shareholder-friendly policies like dividends and buybacks.

CBOE's valuation, despite a premium compared to the S&P 500, is justifiable due to its countercyclical nature and growth potential. It trades in line with its peers and has a history of stable valuations.

CBOE faces a potentially transformative earnings report in Q4 2023, with high expectations set by recent upward revisions in EPS estimates.

The primary long-term risk for CBOE is maintaining its exclusive trading rights for critical products. Regulatory changes could challenge these exclusivities, though the current strong relationship with S&P and CBOE's ownership of VIX rights offers some stability.

Cboe Global Markets, Inc. in a nutshell

Cboe Global Markets, Inc. specializes in providing critical market infrastructure and a range of tradable products, offering diverse services, including trading, clearing, and investment solutions for market participants. Its business is structured into several segments: Options, North American Equities, Europe and Asia Pacific, Futures, Global FX, and Digital.

The Options segment deals with market index options and equity options on individual company stocks. The North American Equities segment focuses on transaction services for listed U.S. equities.

In the Europe and Asia Pacific segment, the company offers services related to transaction handling in pan-European listed equities and derivatives and exchange-traded products, commodities, and international depository receipts.

The Futures segment is represented by Cboe Futures Exchange, LLC (CFE), which facilitates electronic futures exchange transactions. The Global FX segment is dedicated to providing institutional-grade foreign exchange trading services. Finally, the Digital segment is embodied by Cboe Digital, extending the company's reach into the digital realm.

In Q3, the non-GAAP EPS of $2.06 surpassed expectations by $0.20

In Q3, the non-GAAP EPS of $2.06 surpassed expectations by $0.20. The company's revenue reached $480.5 million, marking an 8.6% year-over-year increase and exceeding forecasts by $0.65 million.

The company also confirmed its projection for the upper end of its organic total net revenue growth, anticipating a 7 to 9 percentage point rise in 2023. This forecast surpasses the medium-term expectations of 5 to 7 percentage points for organic total net revenue growth.

Additionally, revenue contributions from acquisitions held for less than a year are expected to add approximately 0.4 percentage points to total net revenue growth in 2023.

Lastly, the company reiterated its expectation that organic net revenue from Data and Access Solutions will grow by about 7 to 10 percentage points in 2023, aligning with its medium-term guidance.

Actionable advice

I am buying any meaningful dip and see the stock well above 200 USD in the months ahead - even if the market declines. The long-term growth story is intact. The derivatives market is a secular growth market, and CBOE is a key unchallenged player.