CM Seven Star Acquisition Corporation (NASDAQ:CMSS), a USD$58.95M small-cap, is a capital market firm operating in an industry, which now face the choice of either being disintermediated or proactively disrupting their own business models to thrive in the future. Many aspects of banking and capital markets are being attacked by new competitors, whose key advantage is a leaner and technology-enabled operating model, allowing them to scale at a faster rate and meet changing consumer needs. Financial services analysts are forecasting for the entire industry, a positive double-digit growth of 11.34% in the upcoming year , and a whopping growth of 52.09% over the next couple of years. This rate is larger than the growth rate of the US stock market as a whole. Is the capital markets industry an attractive sector-play right now? Below, I will examine the sector growth prospects, and also determine whether CMSS is a laggard or leader relative to its financial sector peers. Check out our latest analysis for CM Seven Star Acquisition
What’s the catalyst for CMSS’s sector growth?
The threat of disintermediation in the capital markets industry is both real and imminent, taking profits away from traditional incumbent financial institutions. Over the past year, the industry saw growth in the teens, beating the US market growth of 10.30%. Given the lack of analyst consensus in CMSS’s outlook, we could potentially assume the stock’s growth rate broadly follows its capital markets industry peers. This means it is an attractive growth stock relative to the wider US stock market.
Is CMSS and the sector relatively cheap?
Capital markets companies are typically trading at a PE of 18x, relatively similar to the rest of the US stock market PE of 22x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 11.73% on equities compared to the market’s 10.06%. Since CMSS’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge CMSS’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Capital markets stocks are currently expected to grow slower than the average stock on the index. This means if you’re overweight in this sector, your portfolio will be tilted towards lower-growth. If growth was one of your main investment catalyst in the sector, now would be the time to revisit your holdings in CMSS. Keep in mind the sector is trading relatively in-line with the rest of the market, which may mean you’ll be selling out at a reasonable price.
Are you a potential investor? The financial sector’s below-market growth and average valuation hardly makes it an exciting investment case. If you’re looking for a high-growth stock with potential mispricing, it seems like capital markets companies like CMSS isn’t the right place to look. However, if you’re interested in the stock for other reasons, I suggest you research more into the company’s cash flow as well as its financial health in order to gain a holistic view of the stock.
For a deeper dive into CM Seven Star Acquisition’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other financial stocks instead? Use our free playform to see my list of over 600 other financial companies trading on the market.