IG Group (LON:IGG); Sold.

So early this year IG Group was one of the first stocks that went into the new portfolio. This past week I sold my holding in IGG for a tidy 51% gain including dividend. I sold at around £7.78 a share having bought at £5.25.

Why sell now?

The stock has almost completely retraced its catastrophic fall in Q4 2016 where regulatory enquiry into the sector sent it down from highs above £9 a share to new lows below £5. I felt at the time of purchasing that the margin of safety was fair and that things might not be so bad for IG Group. I set out several cases including my bull case;

'Bull Case; Revenue drops 12% in Europe and 10% in the UK. The company scales down costs in proportion. I make a valuation range of £9.00 - £5.75 - the upper being a DCF and DDM model where the low cost of equity flatters the share and the latter being a target 15x P/E.'

Now with the stock trading up at £8 a share I feel it has surpassed my expectations for returns and it also now trades at 15x P/E. To want to pay much more than 15x P/E I would want an earnings growth rate that is at least 10% if not 15%+.

Now I know the stock has seen a great run in Q4 2017 likely in no small part to the rise of leveraged Crypto-currency trading. However the proposals on a leverage cap from ESMA would I feel devastate the revenues of this business. This is because the initial margin requirements for stocks could rise to 20%, and currencies 3-4% meaning between 2 and 10 fold increases in initial margin requirements. No big deal for well capitalized traders but I suspect the 'punter' retail market would be decimated. 

Whilst I believe IG Group are a well run and responsible business the threat of losing clients to overseas unregulated brokers and the risk to overall revenue growth from clients abandoning trading is great. Therefore at this valuation I believe the risk/reward does not favour holding IG anymore. At the moment their stock brokering business is too small to make up the difference.

I still love the business model and free cash flow generation. I would look to buy back the stock for the long term once the ESMA rules are in place and we have some clarity on future revenues - because today the stock is pricing in almost zero impact. I think that's unlikely now.

Disclosure: I have n positions in LON:IGG. This analysis does not constitute investment advice. I also hold a trading account with IG Index. Read my disclaimer.