How You Can Invest in Discount Investing
Under the right circumstances, setbacks can be quite a gift. They can allow you to buy valuable companies at a discount.
Before the Russian invasion of Ukraine, when Interactive Brokers (IBKR) – Get the Class A report from Interactive Brokers Group, Inc. suffered losses, real-money columnist Paul Price saw an opportunity.
“Investment Brokers is a high-quality, debt-free, pension-free company with a consistent growth record and earnings per share growth of 350% over the past decade,” Price wrote at the time.
This company sells investment software and brokerage services. As with any business that works in the markets, investment brokerage trading is a form of investing in the market itself.
“Brokerage firms exhibit high volatility due to market-related peaks and troughs. IBKR’s valuations have oscillated wildly between multiples of 13.6x (at the Covid-panic nadir) and 58.8x in July 2015,” Price wrote.
“The stock’s average P/E was 28x over the nine years ending 2021. Full year 2021 results set a new EPS record at $3.30, 32.5% from the previous high of 2020. On the heels of this announcement, IBKR reached a new all-time high of $82.83 on December 28.
So what’s going on here? The story behind Investment Brokers is a case of “systematic risk,” hitting the shares of a good company, according to Price.
Systematic risk arises when the value of a company’s stock changes due to events that occur in the market as a whole. The value will rise or fall regardless of the decisions made by the actual company, because trading reflects what investors think of entire industries or markets.
With IKBR, Price feels like it’s a solid stock and a big company caught in a bad market. Investors have started selling his shares because they feel nervous about holding any shares.
At the time of this writing, “Despite nothing but terrific company-specific news, the overall market selloff pushed stocks as low as $63.83,” Price wrote.
This four-week decline of $19 per share (-22.9%) created an unexpected buying opportunity for stock fans.
“Even a partial rebound in valuation to a still-below-normal multiple of 24x suggests IBKR can hit at least $86.16 by year-end.”
The stock was well gone a few days later. The shares closed at $74.78 on Feb. 16, up 17% from when Price first reported. Then another set of systemic risks hit the markets with Russia’s invasion of Ukraine.
Now, shares of the company can be purchased for $61.79, suggesting that sometimes the opportunity presents itself more than once.
Past performance is of course no guarantee of future results, and if you are considering a transaction you should consult your investment professional.