Today we have a very speculative idea: take shares of high-frequency trading platform Virtu Financial (NASDAQ: VIRT), in order to earn with it on the growth of volatility.
Growth potential and validity: 21% behind 18 months excluding dividends; 51,5% behind 3 years and 8 months excluding dividends; 9% per annum during 15 years including dividends.
Why stocks can go up: because if the market is a drama queen, then Virtu is king.
How do we act: take now 30,46 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
We love, appreciate,
Investment editorial office
What the company makes money on
It is a high frequency stock trading platform, options, bonds. In fact, she acts as an intermediary, buying assets from some participants and reselling them to others. You can read more about the company's business in the previous investment idea. For our history, only one fact is important here.: the company makes good money on periods of volatility and frenzied activity on the stock exchange.
Arguments in favor of the company
What will we do with a drunken sailor? The markets have been in a fever for the past few months.. The trading session can open positively and end negatively. And vice versa. Now no one knows, How does the day end on the market?. And it's good for Virtu.
Furthermore, i would expect, that this volatility will remain at its current level and will even increase over long distances, although sometimes it will subside.
The fact, that today most people of retirement age in the United States hold most of the assets in the stock market. These people will live much longer, what their pension allows. At the same time, the aging of the US population risks making index investments less attractive.: the lower the GDP growth, the lower the growth in the profitability of companies from the indices.
So pensioners-shareholders are extremely interested in, to increase the value of their assets, - and in the hope of this they will behave very speculatively and recklessly.
By the way, US public pension funds are increasingly increasing the share of the stock market and even private investment in their assets - just to earn more and partially solve the problem of fulfilling their obligations to pay pensions. So,, and they have a reason for risk and speculation.
So the long-term outlook for Virtu also seems positive to me..
Inexpensive. The company is cheap in relative, as well as in absolute numbers: P / E — 7,89 and P / S — 1,33, capitalization 5.55 billion dollars. This will stimulate the influx of investors into its shares..
Can buy. Considering, that there is an “arms race” among the largest US banks in terms of investing in fintech, as well as all the advantages of Virtu listed above, it can be bought.
Wrecked. The company pays 0,96 $ dividend per share per year, which gives approximately 3,12% per annum. It's not the smallest money, and very likely, that such payments could attract dividend investors into these shares. Well, finally, dividends will brighten up the everyday life of long-term investors Virtu.
Revolt. Activist investors are now behaving like cats under valerian - and there are reasons to consider Virtu an attractive target for one of them.
Judge for yourself: The company's earnings have grown strongly over the past three years., but shares are cheaper, than April 2018, when they were asked for 37 $. I think, given the low cost of the company and the conjuncture of its business, a hypothetical brawler activist might demand at least the first 1.5- to 2-fold increase in dividends in many years, and as a maximum - putting it up for sale. Maybe, some structural changes in the business - in a word, Total, which will positively influence quotes.
What can get in the way
Volatility inversion. Periods of storms in the market will periodically be replaced by calm, and the company's earnings will fall along with its quotes. It needs to be understood and accepted..
You are entitled to nothing. The instability of the company's earnings could lead to the cancellation of dividends - and a strong drop in shares. I am sure, higher yield 3% many supporters of the theory that, that "money should work". So,, reduction in payments can lead to a significant drop in quotations due to the exit from the shares of those, who kept them for dividends.
The flip side of fintech investment. The participation of large banks in investments in the fintech sphere threatens to pump up the value of startups in it even more. And that means, what if Virtu spends money on expanding and modernizing its business in order to diversify it somewhat - and she, probably, will, - then it will cost her a pretty penny.
Cancellation flow. There is talk in the US right now about, to ban the practice of paying for stock order flow. And that's bad: receiving such information, Virtu earns very well. If order flow fees are indeed abolished, Virtu's business will be seriously affected - in this case, its shares threaten to fall even lower. Maybe, Investor fears are already priced into Virtu's stock price, and therefore, until the situation with the ban on payment for the order flow is resolved, its shares may slip indefinitely. This risk must be taken into account.
Accounting. The company's long-term debt, including its recent borrowings, is approximately $2 billion., which is quite a lot and can scare away especially cautious investors from stocks. And such a large debt will serve as a deterrent to increasing dividends..
What's the bottom line?
We take shares now by 30,46 $. And then there are three ways:
- hold shares until, how do they get back to the mark 37 $. Think, is an achievable target within the next 18 Months;
- if last time you took stocks with a long-term expectation, then you can get it now, to see, how to 30 September 2025 they will reach the mark we expected 46,14 $;
- hold shares 15 years, receive dividends and earn on the growing volatility of the US stock market. Probably, during this time the company will become part of a larger organization.
Given the dividend factor, view the news section on the company's website. If dividends are cut, then you will have time to sell its shares in Russia before, how investors will massively react to this news.
