Boston College Fund Hooks Up With Interactive Brokers
1/30/2008 2:21 PM EST
How the B.C. Investment Club Plans to Make Lemonade
The lemons generated by the market's volatility were a sour taste for the club's investment managers, but as the old saying goes, they resolved to make lemonade.
Managers Ben Jordan and Anthony Vitiello came up with a creative solution: invest in a company that would profit from market volatility. Monday night, during their successful pitch, Jordan and Vitiello explained their reasoning for Interactive Brokers Group, a market maker and broker that specializes in options, futures and foreign currency transactions.
Vitiello cites the following reasons for buying Interactive Brokers:
The ability to profit from market volatility: Vitiello explains that when uncertainty rules the market, investors turn to options, futures and other ways to offset market risk.
A unique platform that gives the company an edge in the market: Interactive Brokers' "Trader Workstation," which Vitiello uses for trading in his own account, allows people to test complicated trading scenarios. Such an environment appeals to high net worth investors, who tend to trade more than the average investor and thus bring more revenue to Interactive Brokers.
The stock is "cheap" relative to competitors: Compared with Charles Schwab (SCHW - Cramer's Take - Stockpickr - Rating), Knight Capital Group (NITE - Cramer's Take - Stockpickr - Rating) and TD Ameritrade (AMTD - Cramer's Take - Stockpickr - Rating), Interactive Brokers' PEG ratio is 0.606. vs. 0.79 for Knight Capital, 1.07 for Schwab and 0.88 for TD Ameritrade.
A compelling trend play: The financial environment is trending to more complex products with global scope. Interactive Brokers allows trading in over 70 stock markets around the world, where an investor can trade any financial instrument without having to open up separate accounts at different institutions.
Based on a valuation of Interactive Brokers, Jordan and Vitiello came up with a target price range of $36.70 to $42.42 per share, which would translate into a return of 16.7% to 34.8% from its Monday closing price of $33.34.
How did they come up with that target price range? "In order to estimate price targets for Interactive Brokers we performed a blended multiple valuation," says Vitiello. "We broke the valuation into the firm's two major business units: brokerage and market making. We used PEG ratios as the valuation metric and at the end we weighted each side of the business based on each division's respective percentage of Interactive Brokers's earnings." |
