Market Probably Overreacting to INVESTools' Earnings Flop

| About: TD Ameritrade (AMTD)

Investools (SWIM) just got clobbered on an SEC inquiry and earnings miss. Aside from the bad news revenue was up 66 percent and ahead of estimates driven by Think or Swim. I think their product Investools is a little exploitative. The only reason I'm actually looking at the stock here is because of Think or Swim. It is their brokerage business they bought just over a year ago and it is doing extremely well. Revenue at Think or Swim was up 109% year over year. The board has even approved that Investools change the name of the company to Think or Swim. This is going to happen by year end according to their conference call.

The opportunity in this sector is a historic transfer of wealth that is occurring as baby-boomers are retiring. For the brokerages, I think poor conditions in the US stock market might be off-set by this huge populations of individuals managing their own money. Think or Swim's business has been gangbusters regardless.

That macro story isn't even the play I'm looking at here with SWIM. This kind of over-reaction can be an investors dream because the uncertainty is high with this SEC inquiry but the risk of buying Investools at a big discount is probably very small. The fear in the market creates buying opportunities. The deal I'd like to see here is if the stock falls to below a conservative value of the Think or Swim segment itself. The SEC trouble could be a thing of the past in months and Think or Swim will have new accounts opening up every day. Think or Swim is also sponsoring CNBC's big stock picking contest and has a big ad campaign.

The whole company sells for around $540 million right now in the $8 a share range. I figure Think or Swim is worth conservatively $6 to $8 a share based on last years revenue of $110 million. The $6 to $8 a share is based on a multiple of only 4 times sales. TD Ameritrade (NASDAQ:AMTD) goes for around 5 times sales, OptionsXpress (NASDAQ:OXPS) 5.9, and Charles Schwab (NYSE:SCHW) is selling for about 5 times sales. I have mixed feelings about their Investools but below $7 a share SWIM looks hard to pass up.

Full disclosure: no position in any stocks mentioned.