Hedge Fund Alpha, with its trademark Hidden Value Stocks, aims at stocks that are not in the scopes of big players. Together with professional hedge fund managers, we discuss their strategies and investment thesis, helping to shed light on spots in the market that are marginalized.
In the Q1 2021 edition of HVS, we talked with George K. Livadas, where we touched on the topics of creating a suitable investment process, picking stocks, and going in-depth into one of their then favorites, CBOE Global Markets (BATS:CBOE).
Upslope Capital Background
The firm was established in 2017 by George K. Livadas, and he established the company's strategy while working as a portfolio manager in SCB Global Management, a long/short fund based in Colorado.
Upslope looks to deliver equity-like returns with significantly lower market risks and low correlation versus traditional equity strategies. To achieve this, the fund utilizes a long/short equity strategy based mostly on investing in mid-caps in the U.S. and other developed markets.
The fund is well-versed in packaging and forest products, financial exchanges, brokers, and asset/wealth management sectors.
CBOE Stock Thesis
CBOE is a company that owns the Chicago Board Options Exchange and the stock exchange operator BATS Global Market. The fund analyzed its operations by the revenue, which was divided into asset classes and products.
When looking at asset class gains from options delivered over a half - 52%, almost a quarter, 26%, was in North American equities, 9% was in European equities, 8% in futures, and 5% in FX.
If looking from a product perspective, the revenue was divided into three parts - proprietary transaction-based, non-proprietary transaction-based, and recurring revenue. About two-thirds of revenue comes from highly attractive businesses like SPX options and data/access fees.
History Of CBOE
While the stock underperformed the S&P 500 in the past, the reason behind it is the fact that the CBOE was a typical derivative-focused exchange with the clean operating leverage to volatility.
2017 was a year of change when a short volatility bubble appeared. It grew in popularity due to flawed leveraged short VIX ETNs. As a result, CBOE stocks doubled in just one year. The luck changed in 2018 when the bubble burst, which caused the traders to exit from most of the VIX complex.
Some of the VIX products managed to survive gaining momentum in the coming years. What came was the fact that the issue was not in the CBOE or the VIX, but poorly structured third-party-managed ETNs.
The pandemic in 2020 caused a surge in the VIX sector. While the trading volume was good, the spike in volatility caused another concern for VIX traders. So, in two years, CBOE was dealing with two serious issues. First, VIX is a potentially very problematic product, and second, CBOE was pro-cyclical, which caused volatility that is bad for business.
Upslope saw both of these conclusions as wrong with:
- In case there is not a high level of overleveraged VIX ETNs, the product is sustainable and useful.
- Volatility is still good for CBOE business with the exception of genuinely unprecedented events.
CBOE During the Pandemic
CBOE managed to perform well during 2020 but in an unexpected way. During the year, VIX and proprietary products went through a bad patch, while commoditized and competitive products like equities and vanilla options did very well. As a result, revenue, EBITDA, and EPS went up 10% during the year.
In the coming years it is expected to see a reversing trend. Trade volumes of proprietary products will most likely rise, while the non-proprietary should ease. For 2021 the fund predicted a single-digit increase of the stock.
CBOE Acquisition of EuroCCP
CBOE acquired several companies aiming to complement their business operations, with the most important one being EuroCCP. With this hand-on-cash acquisition, CBOE made the first step into the European equity derivatives platform.
The derivatives market in Europe is not nearly as developed as the one in the US, and the rate of success is low. However, the acquisition was cheap, and the win could be highly beneficial. This acquisition made a negative influence on CBOE stock price, and their expense guidance disappointed Wall Street.
Valuation and Potential
At the time of the interview, the stocks were traded at a 6% FCF yield and 14x EBITDA, which are both reasonable metrics when looking at the company’s history and overall quality. However, consensus estimates are conservative, and most likely the revenues are already ahead from the beginning of 2021.
In the start of 2021, the company was worth about $140 million, which is about 18x EBITDA. The biggest single risk regarding this thesis is the uncertainty regarding the VIX group of products. In case their interest does not rise despite the normalization of VIX levels, it would be a red flag for the product.
Thesis Revisit
In this segment we analyze the success of the thesis and how it withstands the test of time. The first and most obvious indicator is the share price. At the time of the interview (March 2021), CBOE was at ~$100. Stock price saw a slow but steady growth by the end of 2022 when it reached a modest $122.
The year after was a real breakthrough for CBOE when its stock price skyrocketed to ~$180 by the end of 2023. During 2024 it had its ups and downs, and by December it reached a peak value of $215. End of December and the beginning of 2025 saw a decline in price to the $190 mark.
In the first 2025 report, CBOE stock was trading at its 50-day SMA. CBOE stock delivered a 12.3% gain during 2024, which is lower than the industry's 19.2% average.
If we look at their 2024 annual report, the company reported a significant 13.3% increase in trading volume of multiply-listed options and a modest 6% growth in futures volumes. Also, European equities saw solid 5% gains, while there is a sharp 8.4% decline in US equities on the exchange.
Regarding stock performance, CBOE delivered 56.88% over the last three years, outperforming the S&P 500, which generated 25.83% in the same time frame. If we look at a longer five-year period, the S&P 500 fared better, generating 82.02% in contrast to 68.98% of CBOE.
From Upslope's thesis, we saw that there were some insecurities, mostly around the VIX products. But, after four years, it is clear that CBOE is on the rise. It is recognized as one of the top momentum buys that are currently on the market. When looking at the stock price move in the period after this interview (almost doubled in value), it is another reason to assess that CBOE has a future and that it is a great buy option.
