If you're a 40-year-old investor, you're probably not planning on retiring for another 20 years or more. While that may be bit of a downer for those looking forward to the freedom that retirement can bring, the positive is that it gives you more than two decades to grow your investments as you prepare for the big day.
Yet if you're 40 or older, your risk appetite may not be what it was back in your 20s. You want growth, but you don't want to risk losing your shirt to get it.
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Fortunately, there are some businesses that, thanks to their strong competitive advantages, offer an excellent combination of growth and relative safety. Read on to learn about one of the best.
MarketAxess (NASDAQ: MKTX) is the leading electronic credit trading platform, with a roughly 80% share of the U.S. high-grade corporate bond e-trading market. Yet on an overall basis, MarketAxess's share is just 16%. That's because only about 20% of the $4.6 trillion in investment-grade bond trades that occurred in 2016 took place over electronic platforms. Therein lies MarketAxess's opportunity.
The massive global debt market is still rather opaque, with buyers and sellers negotiating most transactions by phone or email. Conversely, MarketAxess's electronic trading platform provides fixed-income investors with a heightened level of transparency, along with improved pricing and trading efficiencies. These benefits are proving popular with regulators and investors alike. In turn, MarketAxess's share of total U.S. high-grade trading volume has grown steadily in recent years.
There are now more than 1,200 institutional clients actively trading on MarketAxess's platform, up from less than 1,000 in 2012. These figures should continue their ascent in the coming years, as more investors demand the transparency, liquidity, and rapid execution that MarketAxess provides. Also, as the number of sellers on the platform increases, the network becomes more valuable to buyers, and vice versa. In this way, these network effects help to further strengthen MarketAxess' competitive advantage over its upstart rivals.
In addition, MarketAxess recently entered new areas of the fixed-income trading arena -- such as the $394 billion leveraged-loan market and the $3.6 trillion municipal bond market -- which greatly expanded its total addressable market opportunity. Moreover, MarketAxess's model is highly scalable; it can add new users to its bond-trading platform with minimal incremental expense. Profits should therefore continue to grow at an even faster rate than revenue as margins expand over time.
At a forward P/E of 35 based on analysts' estimates for 2018, MarketAxess is a premium-priced stock. But its valuation is not unreasonable, considering the quality of its business and the 20% annualized earnings growth rate Wall Street expects it to deliver over the next half-decade. I typically don't mind paying a bit of a premium for an excellent business -- and MarketAxess certainly qualifies as such -- but you'll need to decide if you're willing to do the same.
All told, with its dominant position in electronic bond trading, powerful network effects, and long runways for growth still ahead, MarketAxess is well positioned to reward its shareholders handsomely for many years to come. Thus, if you're a 40-year old investor, you may wish to consider adding it to your diversified portfolio.
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