Tepid response in CME Group (CME) continues to perplex

The good news just continues to roll on in CME Group (CME), yet the stock movement continues to be relatively benign.

Yesterday came an announcement that this options/commodities exchange traded a daily average 14.9 million in contracts; a 78% year over year increase. That's a cash printing press. All this market turmoil is nothing but good for this type of exchange, yet the stock seems to be languishing. The past 2 weeks has seen it stuck near the 50 day moving average of $555. I have been adding slowly to this position.

While not a cheap stock, trading @ 40x this year's earnings and 30x 2008 estimates, for a company growing 30% year over year that is not an outrageous number. My guesses on the lack of response in the stock price are relatively pricey valuations and fears of slowdown in their business; traditionally a market exchange does not grow quite this fast but CME Group (CME) and Intercontinental Exchange (ICE) are relatively specialized niches, which are growing much faster than broader market exchanges. That said, this is not a secret sauce and that news is baked into the valuations of both these stocks.

CME Group has essentially been range bound for all of 2007, trading between $500 and $600. This is most likely just a case of a stock that got ahead of itself with a huge run in 2006 and now needing time to digest these gains. Hence I am slowly building on pullbacks, and trading around the core (sell on spikes, rebuy back on pullbacks, always keeping a core). Once the valuation catches up to the fundamentals, there should be another significant move in this name.

Long CME Group, Intercontinental Exchange in fund; no personal position