Equity markets are broadly expensive compared to historical standards for two reasons. The first reason is that public companies have issued immense amounts of debt through term loans and bonds, which has meaningfully increased enterprise values of firms. From that standpoint, investors have been more cognizant of not just comparing earnings power and cash flow to company market capitalizations, but also look at valuation through the lens of enterprise value and making appropriate adjustments. The second reason is that operating performance for many industries, except a select few, has deteriorated quite significantly in the first half of 2020. Some industries and companies will recover in the second half of 2020 and enjoy easy comparisons come 2021, but others will participate less so and continue to struggle for at least the next year or longer. If you consider a top-down approach, you will see that the 9 broader sectors are selling at EV/EBITDA multiples well above their 7-year averages. Certainly, some of this is driven by business deterioration, increased reliance on debt, and/or investors piling into safer sectors (utilities, consumer staples, healthcare, technology, etc.). Yet, even when considering the abrupt, steep valuation/price recovery over the last six months for broader markets, pockets of value are still hiding in plain sight.
All that being said, the stock exchanges and transmitters of financial data remain well insulated, particularly industry leader Cboe Global Markets, Inc. (BATS:CBOE). There are several reasons to like CBOE here, which will be detailed further below, but overall, it's reasonable to expect that CBOE could deliver at least 30+% upside over the next 2 to 3 years.
Valid Short-Term Concerns
About two months ago, the company's last Wall Street bull finally threw in the towel as Q2 underdelivered the analyst's expectations:
"Cboe's proprietary products, index options and VIX futures, were down
