Under the right circumstances, pullbacks can be quite a gift. They can let you buy into valuable companies at a discounted price.
Prior to the Russian invasion of Ukraine, when Interactive Brokers (IBKR) took some losses, Real Money Columnist Paul Price saw an opportunity.
"Investment Brokers is a high-quality company with no debt, no pension plans, a record of consistent growth, and an earnings-per-share growth of 350 percent over the past decade," Price wrote at the time.
This company sells investment software and brokerage services. As with any company that works in the markets, trading Investment Brokers is a form of investing in the market itself.
“Brokerage companies exhibit high volatility due to market-related peaks and valleys. IBKR's valuations have swung wildly between multiples of 13.6x (at the Covid-panic nadir) and 58.8x during July 2015,” Price wrote.
“The stock's average P/E was 28x over the nine years ended 2021. Full-year 2021 results established a new EPS record at $3.30, 32.5% from 2020's previous record. On the heels of that announcement IBKR hit a new peak price of $82.83 on Dec. 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 occurs when a company’s stock changes value because of events happening in the market at large. Value will go up or down regardless of decisions made by the actual company, because trading reflects how investors feel about entire industries or markets.
With IKBR, Price feels like this is a strong stock and a great company caught in bad market. Investors have begun selling its shares because they feel nervous about holding any stocks.
At the time of writing, “Despite nothing but terrific company specific news, the overall market selloff pushed the shares as low as $63.83," Price wrote.
That four-week, $19 per share (-22.9%) drop created an unexpected buying opportunity for fans of the shares.
"Even a partial valuation rebound to a still-below-normal multiple of 24x suggests IBKR can be at least $86.16 by year-end."
The stock was well on its way just a few days later. Shares closed at $74.78 on Feb. 16, up 17% from when Price first wrote about it. Then, another round of systemic risk hit the markets with Russia's invasion of Ukraine.
Now shares of the company can be had for $61.79 suggesting that sometimes opportunity knocks more than once.
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Past performance is no guarantee of future outcomes of course, and if you're considering a trade you should consult with your investment professional.
