CME Group's Misfit Website Questions Management's Skill

 |  About: CME Group Inc. (CME)
by: John Tobey, CFA

Picture of misfit puzzle pieceI was doing some Dow Jones index analysis and happened across flaws on a CME Group (NASDAQ:CME) website that makes me question management’s skill. The misfit finding is one of those odd facts, like a bad puzzle piece, that doesn’t match the picture of a desirable investment.

Because misfit findings are unusual and can be overlooked, I will spend a bit of time explaining their importance along with an example.

The usefulness of odd facts

A superior or inferior stock investment is rarely identified solely by an analysis of financial data. That analysis is worthwhile for both understanding a company and its valuation. However, finding a stock that has unique return or risk possibilities typically requires spotting an anomaly. This special factor goes by different names with “catalyst” probably being the most common.

One important area that typically requires deduction from observed facts is management skill. This ingredient is key to a company’s future prospects, both good and bad. While financial results will show this skill after the fact, getting a read on management beforehand is what determines our investment success. Usually, we get that view from hearing management’s thoughts and strategies, and viewing its activities. However, occasionally (rarely), we happen across an odd item that can give us special insight. Before getting into CME Group’s odd fact, let’s look at my favorite example:

Case example: Equity Funding Corporation of America

Equity Funding engaged in a massive accounting fraud from the late 1960s through its collapse in 1973 (see here for overview). During those years, the stock was a favorite holding in many institutional and mutual funds. The company’s numbers and management’s story (along with the stock’s performance) generated confidence and enthusiasm.

However, as later reported, one analyst turned thumbs down on the company and kept her leading investment firm out of the stock. Her reason? After a meeting with top executives, she said that, while everything looked good on paper and was supported by management’s comments, she just couldn’t trust a group of executives that wore matching diamond rings on their pinkies.

Obviously, she made the correct decision by observing a fact that didn’t fit. Now on to CME Group and what I found on their website.

CME Group’s odd fact: Inattention to an important product

In 2010 CME Group acquired 90% of Dow Jones Indexes from News Corp’s (NASDAQ:NWS) Dow Jones subsidiary, which retained 10% ownership (details about Dow Jones Indexes can be found here).

The acquisition price of $600+ million was based on the fees earned by licensing the use of the Dow Jones indexes, now numbering over 130,000. Clearly the accuracy and integrity of the indexes is paramount, and, as described in CME Group’s website, the three indexes that started it all are critically important:

The Dow Jones Industrial Average℠ [started in 1896] is one of the best-known icons of American culture and among stock market observers around the world. The Dow® along with the Dow Jones Transportation Average℠ [started in 1882] and the Dow Jones Utility Average℠ [started in 1929] were the world's first market indicators. Each of these three indexes represents a select group of prominent U.S. companies. Together, they make up the Dow Jones Composite Average℠–a "blue-chip" microcosm of the U.S. stock market.

Thus, in my work analyzing the three indexes, I naturally went to the website started by Dow Jones and now maintained by CME Group. I started with the components (companies) in each index and found that many stock symbols were significantly out of date.

click to enlarge

CME GroupClick to enlarge

Moreover, I found the company links didn’t take me to CME Group data about the company, but simply to the component company’s website. Worse, the link was not to the investor section, but to the home page (usually) or some ill-chosen sub-page. There was even a broken link.

The bottom line

"So what?" you say. "This is simply a case of the website guys acting like typical techies: Creating stuff, but not maintaining it well, unless it breaks down and management screams."

However, in today’s world, a website is no longer an ancillary collection of static facts. It is a reality-driven source of up-to-date information, to which companies now drive customers, employees, investors, reporters and others. Therefore, to have key product descriptions filled with outdated information and sloppy errors implies improper management and raises a serious question as to how CME Group is handling its $600+ million investment. Skilled management should produce visible actions that evoke “Wow!” among customers and investors – not “You’ve got to be kidding.”

One other item arose when I looked at CME Group’s 2010 Annual Report:


  • Handled 3.1 billion contracts worth nearly $1 quadrillion in notional value
  • Completed joint venture with Dow Jones for 90 percent ownership of Dow Jones Indexes, including the Dow Jones Industrial Average and approximately 130,000 index properties
  • Acquired London-based Elysian Systems to provide single interface for access to energy markets
  • Expanded strategic partnerships with leading global exchanges including BM&FBOVESPA, Bolsa Mexicana de Valores, Bursa Malaysia and National Stock Exchange of India
  • Reduced corporate debt by $400 million, excluding Dow Jones joint venture

Note the last item, in which it excluded the $600+ million debt taken on to acquire Dow Jones Indexes to have a fifth, positive financial milestone. This is an example of financial cleverness and another reason to question management’s skill (and veracity).

As a result, I prefer not to consider CME as an investment (I do not short stocks). The stock's relative underperformance may suggest opportunity, but the misfit facts could be signaling risk.

CME performance compared to 3 Dow Jones index ETFs

  1. SPDR Dow Jones Industrial Average (DIA)
  2. iShares Dow Jones Transportation Average Index Fund (IYT)
  3. iShares Dow Jones US Utilities (IDU)

CME performance chartClick to enlarge

(Chart courtesy of

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.