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Any FTSE 100 stock that loses more than 50% of its value in just a few months will always grab my attention. But this isn’t just a case of rubber-necking on my part. There’s one recent example that I’m giving serious consideration to buying while others are selling.
Look out below!
After peaking near the 2,000p mark in early June, spread-betting operator IG Group (LSE: IGG) has been losing height ever since.
Much of this substantial drop came on two separate days. The first of these happened at the end of July when the company announced it would be aquiring sports betting platform Underdog.
Now, prediction markets are booming and this particular operator seems to be growing (very) quickly. At $1.3bn however, I suspect investors were concerned that IG might be overpaying for a business that is barely profitable and likely to be a target for regulators going forward.
The second big fall happened only last week (2 October) following a nasty profit warning. In a trading update, management revealed that revenue had dropped 14% year on year in Q3 to £240m. The outlook for revenue growth was also lowered.
News like this was never likely to go down well, and the market reaction was merciless.
What could make this FTSE 100 sink lower?
Things could easily get worse for IG. In a hypercompetitive space, there’s always a risk that smaller, nimbler rivals could steal its lunch. Even if this doesn’t happen, client activity could fall due to markets trading sideways (as they have been). This wouldn’t be a good scenario. IG Group benefits when traders are trying to take advantage of volatility.
The eventual integration of Underdog could also hit a few (significant) obstacles. And it might just be that the growth management’s paying for doesn’t materialise to quite the extent it expects.
Nothing I’ve said above is revelatory. So the question I’m asking is just how much are these risks already reflected in the price? Considering this stock now changes hands for a little less than nine times forecast FY2026 earnings, I’d say ‘quite a lot’.
There are other things I like
But the attraction goes beyond the price tag. For one, the dividend yield now stands at 5.1% — way above the average in the FTSE 100. Despite recent trading, it also looks set to be comfortably covered by expected profit. So I’d say a cut in the near future looks unlikely even though that profit estimate may need to be adjusted.
Although the acquisition of Underdog will impact IG’s balance sheet, this isn’t a company that looks financially strained either.
Waiting for the dust to settle
I can understand why those already invested may be licking their wounds right now. Between 2024 and this summer, IG Group massively outperformed the market return. Most of the gains have now been given up.
With the selling pressure continuing this week, I wouldn’t be surprised if it takes a while for things to stabilise. Eventual ejection from the FTSE 100 is now on the cards too.
But I’m optimistic confidence will return. A bit of director buying would be a good start.
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Paul Summers has no position in any of the shares mentioned.
This story originally appeared on Motley Fool
