GAIN Capital shares drop to five month low following Jefferies price target cut

Shares of retail forex broker Gain Capital Holdings Inc (NYSE:GCAP) dropped 8% on Tuesday to close at $8.94 – their lowest closing price since February, and the first time since then that they have dipped below the magic $9 level – Gain Capital’s IPO price from late 2010.

The latest drop followed a cut in Gain Capital’s price target by investment bank Jefferies LLC. Jefferies reduced its target for GCAP shares from $13 to $11, despite keeping a ‘Buy’ rating on the stock.

The timing of Jefferies’ move is somewhat interesting, coming just a few days before Gain reports June volumes.  So far, June volumes at retail forex brokers are looking pretty good as the Greece crisis led a number of factors injecting a lot more volatility into financial and currency markets during June, continuing into July. We’ve already seen very healthy June FX trading volumes from leading brokers EXNESSSaxo Bank and GMO Click in Japan.

Regarding its reasoning, Jefferies research analysts noted:

2Q15 will represent the first quarter inclusive of the recently acquired City Index business. Cost cutting and integration are expected to take roughly 2 years, with the majority of the synergies back end loaded. FX volatility has held in OK of late, with interest rate hikes the next potential catalyst on the horizon in our view.

A number of senior Gain Capital executives have been selling stock recently, including CEO Glenn Stevens and CMO Samantha Roady.

Gain is still a few weeks away from releasing Q2 financial results – as Jefferies points out, the first quarter to include results of City Index, which Gain acquired in early April.

We don’t believe that this issue affected Jefferies’ decision to cut its price target (or its research generally), but we would like to remind our readers that Jefferies’ parent company, Leucadia National Corp. (NYSE:LUK) recently bailed out Gain Capital’s rival, FXCM Inc (NYSE:FXCM), via a $300 million loan. The loan effectively allowed FXCM to stay in business after a huge loss due to negative client balances incurred from the January 15 Swiss Franc spike. And in that deal, Jefferies itself pocketed fees of more than $20 million.

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