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Interactive Brokers’ Stock Looks Poised for Higher Ground. Here’s How to Play It.

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Interactive Brokers Group’s
stock usually fails to attract the attention and respect that it deserves.

The electronic brokerage firm, which offers active investors sophisticated trading tools and low commissions, recently reported third-quarter adjusted earnings per share of $1.08, handily beating the consensus estimate of 96 cents. Net revenue of $847 million set a quarterly record, too, rising 18% quarter over quarter, and 30% year over year.

The company’s performance is in stark contrast to many companies around the world struggling under the weight of inflation, rising interest rates, and the financial and economic hobgoblins that dominate the market narrative.

Unlike other stocks that have stalled or slid to the bottom of their 52-week ranges, Interactive Brokers’ (ticker: IBKR) stock is on the verge of hitting an all-time high. The lack of awareness about the company’s performance probably reflects the view that many investors tend to have about closely held companies like Interactive Brokers.

Interactive Brokers was founded by Thomas Peterffy, who remains chairman and owns the majority of the stock. Peterffy emigrated from Hungary to the U.S. with his intelligence and not much else. He is acknowledged as one of Wall Street’s greatest investors and executives. He might have been the first person to use computers to trade options, which ultimately led to starting Interactive Brokers, making him one of the world’s wealthiest people. For the past five years, Interactive Brokers has been ranked by Barron’s as the top online broker.

Though Wall Street often admires entrepreneurs for their success and wealth, institutional investors often fear closely held companies because founders have so much control. That’s one reason that Interactive Brokers has rarely basked in the stock market’s limelight.

And yet, Interactive Brokers’ stock now looks like it could push past its 52-week high and into a higher trading range. During the past 52 weeks, the stock has ranged from $52.18 to $82.83. The stock is up about 1% for the year, compared with a decline of about 16% for the
S&P 500 index.

With the stock around $80, aggressive investors could sell Interactive Brokers January $75 put and buy the January $85 call. The risk reversal—selling a put and buying a call with a higher strike price but the same expiration—recently cost about 15 cents. The strategy pays investors to buy the stock at $75, and to profit above $85. At $100, for instance, the call is worth $15.

The risk: If the stock falls far below the put strike price, investors would have to buy the stock at $75 or adjust the position to avoid assignment. The fact is that owning the stock is unlikely to be a hardship for long-term investors.

Over the past decade, the stock has surged. Anyone who bought the stock at about $12 in 2012, for instance, has made a return that exceeds 550%.

Rich Repetto, who has long followed the company for Piper Sandler, recently advised clients to overweight the stock. After the recent earnings report, he upped estimates for the fourth quarter to $1.12, up four cents. He increased 2023 earnings per share to $4.82 from $4.68.

Part of the stock’s extraordinary performance this year probably reflects the beneficial effect of rising interest rates on the company. As the Federal Reserve boosts interest rates, Interactive Brokers passes along some of those higher rates to customers. If the Fed and other central banks keep raising rates—which is widely anticipated—Interactive Brokers should make even more money.

Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.



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