Why this industry is dominating the market

The S&P 500 is up about 19% so far this year, and the Nasdaq Composite Index has surged more than 36% this year. The technology sector has been a huge driver as it recovers from a disastrous 2022.

But one industry within the financial sector has quietly generated big profits again this year. It is financial data and exchanges. This industry includes companies that operate stock exchanges and provide financial data and analysis primarily to institutional investors.

Of the dozen or so major publicly traded companies in the industry, about half are beating benchmarks, mainly on cryptocurrency exchanges. coinbase (NASDAQ:COIN). Other top performers include: CBOE Global Markets (NASDAQ:CBOE), Moody’s (NYSE:MCO), dawn of fame (NASDAQ:MORN), CME Group (NYSE:CME) and Standard & Poor’s (S&P) Global (NYSE:SPGI).

Below is an overview of what has led to our success and where we can move forward.

Coinbase Rocket Increases 280%

Although these stocks are all part of the same general industry, they tell different stories because they cover different segments. Take away coinbase, for example. Shares of this cryptocurrency exchange are up a whopping 280% YTD and are trading at around $137 per share.

However, its value has fallen 86% in 2022, plummeting from a high of about $350 per share in November 2021. This rise is largely due to the rebound and suspended interest in the two largest cryptocurrencies, Bitcoin and Ethereum. Raising interest rates helped.

Although there is excitement about the possible approval of the first Bitcoin exchange-traded fund (ETF), many uncertainties still remain in the cryptocurrency industry.

Coinbase’s net revenue increased 8% year-over-year in the third quarter to $623 million, but declined 6% in the second quarter. More importantly, we reduced our net loss to $2 million. While these are solid and improving numbers, they may not be enough to justify large returns.

The cryptocurrency winter we saw in 2022 may be over, but there remains tremendous uncertainty and volatility in the cryptocurrency space, causing the collapse of some of Coinbase’s competitors. Given the steep price increase relative to the negligible revenue generation, it’s currently somewhat overvalued, so I’d be reluctant to jump on it at the moment. There are better investments elsewhere in this space.

CBOE Global Markets and CME Group There are two of them. They are two of the leading derivatives exchanges. CBOE is up about 40% YTD, while CME is up about 25%. These two stocks were driven by high trading volumes on the exchanges.

In November, CME Group set a record for the month with 28.3 million average daily derivatives volumes (ADV) traded on its platform, up 21% from the previous year. In the most recent quarter, sales increased 9% year-over-year and net income increased 10%.

Likewise, CBOE experienced a surge in trading volume in its most recent quarter, resulting in record net revenue and a 38% increase in earnings per share (EPS), up 9% year-over-year.

Both are reasonably valued, but of the two, CME has a greater upside potential due to its larger presence in Treasury and bond futures trading. These markets will continue to perform well even in a high interest rate environment.

Moody’s, Standard & Poor’s, Morningstar

Two other big gainers in this space are: Moody’s and Standard & Poor’s (S&P) Global. These two companies are similar in that they are the nation’s leading credit rating agencies and both have strong data, analytics, and market intelligence businesses. S&P also operates an index business, as the owner of the S&P 500 and several other market indices. Moody’s stock is up 35% YTD, while S&P Global has returned 25%.

Both companies have benefited from increased debt issuance, and their respective analytics and market intelligence businesses continue to grow through virtually every type of economic cycle as markets become increasingly complex.

dawn of fame Although much smaller than S&P or Moody’s, they are similar in that they provide investment research and credit rating services to individuals and institutions. It also has an investment management division.

In its most recent quarter, Morningstar saw revenue rise 10% and net income jump to $39 million from a net loss of $9 million a year ago. The stock is up about 28% YTD, and since products and services are tied to the market, stock prices typically move in line with them.

Moody’s and Standard & Poor’s are so dominant in the industry that they will almost always be solid buys. However, Standard & Poor’s currently looks like the better option of the two, given its more diverse revenue streams and market power.

Overall, the best buys in this group of stocks include Standard & Poor’s and CME Group. The only thing I want to avoid right now is Coinbase.