PSB Monthly Issue October 2014

| October 2, 2014

October 2014


When thinking about trading and investing, most people’s first thought is “stocks”. Maybe some people think of bonds or commodities, but by and large, it’s all about the stock market.

Here’s the thing…

There’s a much bigger financial market out there.  Most people don’t even really realize just how big it is.

Average volume in this market is $5 trillion… PER DAY.  That’s right.  This market trades $5 trillion per day while equity markets trade a bit over $200 billion per day.

Clearly, this mystery market dwarfs the stock market in terms of transaction volume.

Okay, if you haven’t guessed it by now, I’m talking about the FX market, also known as Forex, or the currency market.

There’s no doubt about it – the FX market is enormous.

Over the last decade, currency trading has seen consistent growth… much more so than equity trading.  What’s more, currency trading is highly distributed across the globe.

It’s not just Americans trading, it’s popular across the world. With that much reach and growth, you can imagine how lucrative Forex trading platforms can be.

That’s precisely why we’re recommending GAIN Capital Holdings (NYSE: GCAP).


Key Investment Data

Name:  GAIN Capital Holdings
Ticker Symbol: GCAP
Market Cap: $263 million
Recent Price: $6.38PSB Rating System 4.8 Stars

Raging Revenue:  (4.5 stars) While the low interest rate environment has hurt retail revenues, the company is effectively diversifying revenue streams.

Beautiful Books:  (5.0 stars) GCAP has over $850 million in cash compared to $67 million in debt. That means future acquisitions, share buybacks, and even a quarterly dividend.

Stellar Structure:  (4.8 stars) The company has huge insider ownership at 88%. Institutions own another 9%. There’s very little chance for panic selling with so much of the stock owned by insiders.

Valuation Verification:  (4.8 stars) GCAP is trading at just 10.1x future earnings, 0.9x sales, and 1.1x book value. Given the valuation, the shares could climb 88% or more.

Meaningful Milestones:  (4.9 stars) The company has been very aggressive on the M&A front, with more to come. Plus, next year’s expected rise of interest rates could really spark retail sales.


GCAP provides trading services and solutions to retail and institutional customers.  Its most popular products are offered through, which provides self-directed currency trading for retail customers.

The company offers a range of tradable financial products including spot forex, precious metals, spread bets, and other investment products.  What’s more, it has an institutional platform, which provides liquidity in foreign exchange and precious metals markets for banks, brokers, hedge funds, asset managers, and other large clients.

Finally, the company offers exchange-traded futures. GCAP’s strategic entry into futures trading provides a more diversified revenue stream as the business is based on commissions.  (That’s compared to the retail currency business, where the company gets a small piece of the bid/ask spread for each trade.)

But the addition of futures trading isn’t the only way GCAP is growing…

You see, the company is heavily focused on diversifying their revenue streams as much as possible.  While retail still makes up the majority of its revenues, GCAP has made huge strides towards diversification in recent years.

In fact, in 2011, retail revenue made up 97% of all revenues.  In 2013, the percentage had dropped to 74%.  Institutional revenue now accounts for 19%, and exchange-based trading (futures mostly) makes up 6%.

Management has been aggressive in making strategic acquisitions, both to diversify but also to grow revenues overall.

That’s not to say the retail business should be ignored.  After all, the company has retail customers in 180 countries with over 120,000 funded accounts.  Moreover, those accounts trade an average daily volume of $8 billion!


The biggest issue facing GCAP in recent years has been the lack of volatility in the currency markets.  You see, currency traders make money on movement (i.e. volatility), and the historically low interest rate environment has basically erased currency market volatility.

In fact, volatility is lower than it’s been in at least 10 years.  And, it’s been a sustained low-volatility environment.  As such, the company’s retail revenues have dropped somewhat from last year.

However, the number of funded accounts is up 37% from last year, which is very promising.  Considering interest rates are expected to start rising in 2015, GCAP is well-positioned for a sales resurgence.

What’s more, as I mentioned earlier, the company continues to grow its futures business.  Futures are important because they generate commissions and don’t rely on volatility.  The addition of this business should help reduce volatility in quarterly results.

But here’s what’s really important…

Due to the nature of the business, GCAP generates a ton of cash.  As a matter of fact, the company is sitting on $853 million in cash compared to just $67 million in debt.  That cash can be used for acquisitions or share buybacks.  And, the company even offers a quarterly dividend of $0.05 per share.

Management has said several strategic acquisitions are in discussion, with a strong M&A pipeline.  It’s easy to be optimistic about the company’s growth prospects under these conditions.


As with any small cap investment, GCAP does have a few risks.

A slowdown in the overall economy could keep rates low and put pressure on retail sales.

The company’s M&A pipeline could take longer to develop than expected causing investors to lose patience and jump ship.

Finally, government regulations regarding currency trading could change and potentially reduce sales or increase costs.


Earlier in the year, the retail business was stronger and GCAP reached as high as $12 a share.  Given the expected increase in interest rates next year, there’s no reason GCAP won’t get back up to that price.

Plus, the stock looks cheap from a valuation standpoint as well.

At the current price, the stock’s trading at just 10.1x projected earnings.  It’s also trading at a miniscule 0.9x sales and just 1.1x book value.  No matter how you look at it, the shares are trading at a steep discount.

Based on our analysis, we see GCAP climbing to $12.00 a share or more.  Buy the shares now for potential gains of 88% or more!


BUY GAIN Capital Holdings (NYSE: GCAP) up to $6.95 per share.

Recent price is $6.38

Use a stop-loss of $4.50 on this position.

Don’t forget your position sizing and stop-loss rules.

Portfolio Update

Here are some highlights from the past couple weeks…

  • Nevsun Resources (NSU) and NetSol Technologies (NTWK) both reached new highs since our last update.
  • Nevsun Resources (NSU) issued a $0.035 dividend on September 26th, effectively lowering our entry price to $3.22.
  • Vonage (VG) has hit our stop-loss price, so it’s time to exit the position.


Category: PSB Monthly Issues

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