An Exchange That Has Lots of Energy

08/30/2007 12:00 am EST


Ivan Martchev

Editor, Vital Resource Investor and Global Viewpoints

Ivan Martchev, editor of Vital Resource Investor, finds an exchange with a lot to recommend it—NYMEX, whose stock has been stuck in the mud.

My favorite energy exchange NYMEX Holdings (NYSE: NMX) is a very volatile stock, even without the negative headlines that have been haunting the stock market. The issue is that the stock has always traded at a high price-to-earnings (P/E) multiple since it went public last year.

Virtually all exchanges that have gone public have been successes. So when NYMEX rolled out its initial public offering (IPO), the stock immediately traded at a premium. The stock has never traded below its IPO price, but it’s been locked in a trading range ever since the sell off, the last couple weeks notwithstanding.

There was huge jump in NYMEX shares [last week], confirming that management was actively looking for the highest bidder. Since the IPO, this has been an opportunity to cash out for the numerous seat holders who’ve now become shareholders of NYMEX.

Market participants feared that, after the IPO lockup period, expired former seat holders would flood the market with restricted stock. This is one of the very reasons NYMEX has been trading sideways for so long, despite posting excellent operating numbers. But it didn’t happen.

Instead, management has been looking for a buyer to take the whole thing at a substantial premium, and the seat holders have been holding their stocks without selling too much into a sideways market. The stock is a little below where I initially recommended it, but it’s clear that this is some type of tactic to get shares moving and perhaps force the sale in a nearly completed negotiation.

Buying the stock at the present level gives you the dominant energy exchange that operationally is still growing fast. It should fetch a premium when the actual sale hits the wires, if not set off a bidding war, as was the case with the Chicago Board of Trade. (That exchange ultimately went to the Chicago Mercantile Exchange.)

I’d been looking at this as a long-term holding because I believe in the unique fundamental advantages of this company. But if it decides to sell it as a premium, so be it. Hold NYMEX Holdings if you have the shares, and buy it if you don’t. (It closed above $123 Wednesday—Editor.)

The risk here is that if no sale goes though, the stock may be pressured along with the rest of the financial sector. This may be a commodity exchange, but it’s still a financial stock. And financial stocks globally have been leading stock markets lower.

In the present environment, I don’t recommend any exposure to major Wall Street banks (other than short) until the smoke clears. This mortgage mess has hit everything from commodities to currencies, and it’s far from over.

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