1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Dr. Paul Price
Dr. Paul Price
Articles (476)  | Author's Website |

It's Knight's Day to Shine: Knight Capital

June 28, 2011 | About:

It’s a very rare stock these days that trades below their late 2008 – early 2009 absolute lows. That was a panic-driven, sell-everything environment that pushed most shares to outrageous levels that were unrelated to those stocks' true values.

What saved Knight Capital (NYSE:KCG) from that fate was its all-time record earnings of $1.94 during 2008. KCG did fall from $19.80 to $11 before rebounding to a 2009 high of $23.10 even as earnings slipped to $1.54 a share. Since that peak Knight’s share price had steadily declined to a new five-year low during Tuesday’s session.

847494674.jpg



From yesterday’s close of $10.79 I see very low risk and huge upside. KCG trades at a steep discount to tangible book value of almost $15 per share and boasts a nice balance sheet with only 19% debt as a percentage of total capital.

First quarter earnings came in at $0.33 versus $0.30 and well above consensus estimates. Zacks now expects $1.16 for 2011 and a ramp up to $1.46 in 2012. That leaves KCG at just 9.3x this year’s and 7.4x 2012’s expectation. While I don’t look for a high multiple on KCG, their previous trading history suggests 11.5 – 12.0 to be a more normalized P/E.

That would bring KCG back to $13.34 – $13.92 by year end and to a very nice $16.79 - $17.52 over the next 18 months or so. Both those targets may prove to be quite conservative in light of the fact that Knight touched $14.70 already in 2011 and peaked out at between $17 and $23.10 in each of the five previous years.

My guess is that portfolio managers have been dumping KCG to avoid showing it on their semi-annual statements. Nobody likes to admit they’ve held a poor performer so it’s easier to simply purge it before June 30 and avoid answering questions. If I’m right on this you may very well see a quick repurchase of these shares shortly after the quarter is over.

Morningstar seems to agree. They rate Knight with 4-Stars (out of 5) and see "fair value" as $19 per share. Standard and Poors is a bit more in line with my own projections with a 12-month target price of $15.

With KCG just pennies above a five-year low I’m a buyer of shares and a seller of puts out to January 2012.



Buy 1000 KCG for $10.79 /share


Put Premium


‘If Put’ Price


Margin of Safety*


STO 10 Jan. 2012 $10.00 Puts


$0.75 /sh.


$9.25 /sh.


14.2%


STO 10 Jan. 2012 $12.50 Puts


$2.15 /sh.


$10.35 /sh.


4.07%


* margin of safety = % the ‘If Put’ price is below the $10.79 trade inception price


Disclosure: Long KCG shares and short KCG options

Dr. Paul Price

www.BeatingBuffett.com

www.OptionsProfits.com

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.gurufocus.com/peter_lynch.php
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 2.8/5 (9 votes)

Comments

Please leave your comment:


GuruFocus Mobile App Available


Select portfolio(s):

  • Loading...

Why you are interested?

Your selection and notes will be stored in your portfolio.

Login to add portfolio
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
FEEDBACK