Trade idea: Long Macquarie Bank

With Fed expectations at fever pitch, AUD/USD shorts at record all-time highs and momentum in the general market activity ramping up, I see MQG as a potential trade that can capture all this opportunity in one.

Source: Bloomberg

The risk is in current strength, which has seen Macquarie Group Ltd (MQG) moving to seven-year highs. However, recent quarterly updates have made a very strong case for a further upside re-weighting.

MQG has benefited from increased activity in funds under management (FUM), asset deals and banking over the past 18 months. However, recent activity in the European and US markets has seen its transaction-based businesses – particularly its fixed income, commodities and currency (FICC) division – returning to double-digit revenue and EPS growth, which in turn is further ramping up FY15 expectations.

MQG also has perfect exposure to increased movements in currencies and commodities due to the fact it receives a substantial amount of its revenue in USD. CEO Nick Moore has a habit of under-promising and over-delivering. In his previous five updates, all have been to the upside.

With a weaker AUD, low global interest rates, rising asset prices and improving operating conditions, MQG looks to be a perfect way to take advantage of both the moves in the markets and USD appreciation.

Key statistics

Forward blended price to earnings: 15.6 times

FY 2015 yield: 4%

12 month forward EPS consensus: $5.03

52 week range: $54.23 to $76.60

Potential trade

I am looking to take advantage of the dips in the financial space, along with expectations the USD will move higher over the next eight weeks. I would look to buy MQG on dips or even at the current price. I expect a pop in the stock on further USD strength and market volatility as its core businesses will continue to benefit in the current conditions.

We can see resistance at $77.50 but we may see the Fed remove the word ‘patient’ from forward guidance, giving MQG the push it needs to punch through. I therefore would set a limit at $81.25, which is the mid-point of the 2008 highs, as I would expect profit taking at these levels.

If the Fed holds off on its forward guidance, MQG is likely to fall back to $72, which I would still take as a good buying opportunity. I would, however, be concerned if it broke through the $70 handle as momentum would have clearly been revised. I would therefore put a stop loss at $70 to mitigate a short-term slide.

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