You can still make money on longs in the financial sector these days.
Interactive Brokers (IBKR) is an online broker offering some of the lowest transaction costs and access to more international markets than any of the larger brokers, but most of its profits actually come from being a market maker in stock derivatives through a wholly owned subsidiary, Timber Hill. The company uses sophisticated proprietary trading and risk management models, and sees itself as a technology company.
Last May, JC Flowers invested $300 million in MF Global (MF), a derivatives broker and trader who follows a similar model, which in my view provides some validation on the sector and business model; however, this week, MF Global announced lower earnings guidance and the need to raise $300 million of very dillutive capital. The stock was hammered more than 40 pct. (it had also fall off a cliff two or three months ago, before JC Flowers came in). This further strengthens my conviction on IBKR's excellent execution. The stock is up 4% for the ytd (June 20, 2008) and 25% for the last 12 months.
Why did I bet on IBKR? I like the space (stock derivatives have been growing at a very fast pace and, unlike their over the counter cousins, listed derivatives do not present the same counterparty risks) and the business model (very technology intensive and with a distinct value proposition offering a single platform for global trading and very low costs trying to lead through volume); but the most important reason was its Founder and Chief Executive.
Tom Peterffy, an Hungarian emigre, is a very independent unconventional thinker who has been a leader in innovation in the sector (he has been ahead of the curve in electronic trading) and is relentless in the pursuit of excellence for his company. A logging company surveyor before he fled communism at 21, he literally started with nothing and has built a multibillion-dollar enterprise. An example of his non conventional thinking was the fact when he IPOed the company ,he used WR Hambrecht and the same Dutch auction model that Google (GOOG) used and which the street was so upset about (this model is most tranparent and efficient way to offer shares to the public).
It is much better to have a guy like Tom in your foxhole during turbulent times than your average Wall Street CEO (I will open an exception for Goldman Sachs (GS) here) who has been molded in an environment where lemming behavior is the rule.
I'm holding on to my shares and will continue to accumulate on weakness. I think that this company, which is shooting for the stars, is "gonna" go far.
Disclosure: Author has a long position in IBKR