You can still make money on longs in the financial sector these days.
Interactive Brokers (NASDAQ: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 (NASDAQ: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 (NYSE: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