Combined Riches

In this edition of the Smart Investor newsletter, we examine one of the world’s leading electronic brokerages. But first, let us delve into the latest Portfolio news and updates.


Portfolio Stock Updates

❖ Broadcom (AVGO) saw its shares soar to a new record after the chipmaker reported a better-than-expected fiscal second quarter and lifted its full-year revenue outlook on surging artificial intelligence demand. Broadcom also announced plans for a long-awaited stock split, similar to that of NVIDIA.

❖ Oracle (ORCL) extended its strong rally, which was sparked last week by partnership agreements with Alphabet, Microsoft, and OpenAI, alongside surging bookings and upbeat guidance.

❖ Super Micro Computer (SMCI) jumped in the past several days, riding the wave of AI optimism following Oracle’s and Broadcom’s upbeat guidance. In addition, the stock saw several analyst rating and price-target upward revisions. In other company news, Supermicro announced it will build three new manufacturing facilities that will focus on delivering entire plug-and-play liquid-cooled solutions to AI data centers.

❖ Adobe (ADBE) saw its shares pop after it reported stronger-than-expected fiscal Q2 2024 results and raised its guidance for fiscal 2024 on robust demand for its AI-powered document and creative software.

❖ PayPal (PYPL) shares dropped in the past week as investors were concerned over increased competition in the digital payment space, specifically after Apple’s introduction of new features simplifying money transfers and expanding buy now, pay later (BNPL) options.

❖ Crane NXT (CXT) was listed by D.A. Davidson as one of its “Best of Breed” stocks, a list that “attempts to identify the highest quality companies with strong competitive positioning and exceptional financials”. D.A. Davidson foresees an upside of ~58% for the stock in the next 12 months.


Portfolio Earnings and Dividend Calendar

❖ The Q1 2024 earnings season is over, but Portfolio companies with fiscal years that differ from the calendar year are still scheduled to report. Thus, TD SYNNEX (SNX) will release its fiscal Q2 2024 results on June 25th.

❖ The ex-dividend date for Broadcom (AVGO) is June 24th.



New Buy: Interactive Brokers (IBKR)

Interactive Brokers Group, Inc. is an American multinational automated electronic broker, which specializes in executing and clearing trades in stocks, options, futures, foreign exchange instruments, bonds, mutual funds, ETFs, precious metals, and cryptocurrencies.


Unparalleled Reach and Depth

The company traces its routes to T.P. & Co., a market maker founded in 1977, later renamed Timber Hill Inc. The company made history by becoming the first to use handheld computers for trading in 1983; in 1987, it created the world’s first fully automated trading system. In 1993, Interactive Brokers Group was established, taking control of the electronic brokerage business developed by Timber Hill. In the 1990s, the company enjoyed fast international expansion, first in Europe and later to other geographies.

Today, Interactive Brokers has offices in Canada, the U.K., Europe, and Asia Pacific. Headquartered in Greenwich, Connecticut, the firm operates the largest electronic trading platform in the U.S. by number of trades processed daily. With a market capitalization of $51 billion and annual revenues of $4.43 billion, IBKR ranks #473 on the Fortune 500 list.

IBKR has over 2.7 million user accounts, with clients in over 200 countries and territories trading through its unified platform on 150 global markets. The number of markets served and the number of trading vehicles available through IBKR is unparalleled.


Diversified Offerings and Client Base

Interactive Brokers has historically focused on institutional and high-volume traders, offering advanced trading tools and a professional-grade platform. Thanks to its competitive adjustable commission and margin rates, as well as excellent trade execution, IBKR is the preferred trading platform for hedge funds and other professionals.

However, in recent years, IBKR has also seen its appeal with retail investors surge thanks to a commission-free pricing model and several new features catering to individual investors. Interactive has developed and incorporated a wide range of tools helping traders screen, analyze, and trade stocks and other securities.

IBKR’s revenue streams are geographically diversified, with roughly a third of the client accounts registered in the Americas, another third in Europe, and the rest in Asia Pacific. However, the Americas client base is responsible for 52% of the brokerage’s commission revenue and 46% of total client equity. Almost 70% of IBKR’s accounts are held by individuals, who pay 56% of the commission volume and hold 43% of client equity.

Although the number of client accounts registered with Interactive Brokers is smaller than that of its competitors (such as Fidelity, Charles Schwab, Robinhood, and E-Trade), its assets under management (AUM) of over $380 billion is the largest in the industry. IBKR has many more high-value and professional clients than its competitors, which allows the company to generate significantly higher revenue per customer.


Competitive Business Model

IBKR has several revenue streams, making it more resilient to market fluctuations than most of its competitors. Its largest source of income is commission revenue, either charging commissions on trades (on the IBKR Pro platform) or receiving payment for routing the orders to market makers (on IBKR Lite). Despite low-percentage commissions, Interactive is also able to generate significant and rising revenue streams thanks to very high trading volumes.

Interactive’s second key revenue generator is interest income. This income comes from the spreads in lending and borrowing rates, as IBKR lends money for margin trading. In addition, the company also earns interest from customer cash balances, as well as from lending securities for short selling.

IBKR has plenty of competitive advantages, including the lowest costs of business thanks to advanced technology and extensive levels of automation, which support high efficiencies. In addition, the low cost of business is passed on to IBKR’s customers through lower fees or better interest rates on loans, creating a “virtuous circle” of economies of scale.

This scale is supported not only by attractive pricing, but also by superior product offering, with access to the largest number of global exchanges, currencies, and types of securities among its industry competitors, all through a one-stop-shop platform. As a result, in contrast to many of its competitors, Interactive displays consistent and rising profitability from its trading platform. This distinguishes it from other firms, which have to compensate for declining trading revenues with interest income and/or investing in bonds and other assets.


Stellar Fundamentals, Fast Growth

Interactive Brokers is ideally situated financially, with zero net debt (it has more cash than its total liabilities) and a credit rating of “A-” by S&P Ratings. The company has $14.7 billion in equity, which is more than $10 billion above the level required by regulators. This fundamental strength has supported the company’s fast growth over the past several years, as well as an outlook for continued expansion, as IBKR’s fortress-like balance sheet has earned institutional investor trust in the safety of the platform.

In addition, the company’s impressive cost-effectiveness means that it can draw in more clients by offering the lowest fees and interest on loans, as well as the highest interest rates on deposits, all the while maintaining industry-leading pre-tax margins.

Thus, in June, IBKR reported a year-over-year growth of 27% in client accounts and daily average trades, a 41% increase in client equity, and 33% higher client margin loan balances. This growth builds on Interactive’s impressive track record, with client accounts surging from ~750,000 in Q1 2020 to over 2.7 million today, while client equity increased from $150 billion to over $450 billion over the same period. More accounts and client equity mean higher trading activity and higher margin loans, increasing Interactive’s revenues and margins.


Fact-Based Growth Outlook

In the past three years, the company’s revenues increased at a CAGR of 21.5%, while its adjusted earnings-per-share rose at a CAGR of 25%. IBKR has reported a double-digit year-on-year EPS growth in the past seven consecutive quarters, and analysts expect the same trend to continue over the next several years.

This outlook for protracted, strong growth is supported by the projected continued increase in the global electronic brokerage market, which is expected to grow through all economic cycles. Thus, during the latest down market in 2022, brokers in general saw strong account growth. However, not all brokerages are created equal, as IBKR’s accounts surged by 25% while most of its competitors saw low single-digit growth rates. Thus, Interactive is well positioned to capture a larger share of the growing global brokerage market.

Within this realm, one of the most straightforward paths for the firm to gain additional market share is the international markets, thanks to its lead on competitors in terms of currencies and exchanges covered. In addition, IBKR’s management said that they are looking to effectively deploy the significant amounts of capital they have available to support further expansion.

In addition, some of IBKR’s competitors, such as Robinhood, operate on a zero-commission basis, relying on revenues from payment for order flow (PFOF). European regulators plan to ban PFOF in 2026, as this practice often leads to higher execution prices for clients; other countries may follow suit, thus rendering PFOF-dependent business models worthless and giving Interactive a clear advantage.


Attractively Priced Profitability

Interactive Brokers has a very conservative capital allocation policy, built around its founder’s belief that in the world of finance, safety and stability are paramount. For this reason, the company retains most of its earnings and doesn’t splurge on lavish management compensation or aggressive buybacks. However, the company compensates its shareholders through dividends, which it has paid since 2010. The payout has been stable through the years, but in May the company hiked it by 150%, signaling confidence in continued successful delivery and a willingness to return more earnings to shareholders.

Interactive’s stock surged almost 50% in the past 12 months, reaching an all-time high in May this year, but giving back some of this gain since then due to investor profit-taking. Generally, IBKR’s shares display significantly lower long-term volatility than the market, partly because of the company’s unique ownership structure.

Only about 25% of total stock – the “A” shares – is available to the public, with almost 75%, or all of the “B” shares, held by its founder. This structure somewhat clouds the picture when it comes to establishing the company’s fair valuation. However, it can be said that Interactive currently trades at a slight discount to its historical P/E ratio, and in line with the average for the U.S. Capital Markets industry. When compared to its peers in the industry, IBKR comes in the middle of the price range, which translates into a cheap acquisition given its outstanding finances, profitability, and growth rates.


Investing Takeaway

Considering Interactive Brokers’ stellar financial health, sound management, solid capital allocation, fast expansion, industry-beating profitability, and realistic expectations for further success, we believe that the stock can be a valuable addition to the Smart Investor portfolio.



New Sell 1: Cboe Global Markets (CBOE)

Cboe Global Markets, Inc. provides investment and trading solutions and products in multiple asset classes, including equities, derivatives, foreign exchange, and digital assets, across North America, Europe, and Asia Pacific. Cboe owns the Chicago Board Options Exchange (CBOE), the world’s largest options exchange and the third-largest stock exchange in the country. Cboe also owns the stock exchange operator BATS Global Markets and the CBOE Futures Exchange. In addition, the company owns Cboe Fixed Income Markets and Cboe FX Markets. It also provides investors with access to spot and derivative trading of cryptocurrencies through Cboe Digital.

Despite its strong track record of beating analysts’ earnings estimates – which continued once more when the company reported its fiscal Q1 numbers in May – the company’s stock has strongly underperformed the market in the past few months. While the Capital Markets industry has been under pressure lately, as displayed by the diversion between the SPDR S&P Capital Markets ETF (KCE) and the S&P 500, CBOE stock fared even worse.

There was no apparent reason for this underperformance, i.e., no negative company or industry news. The only news casting some shadow on the existing leading stock exchanges, including Cboe, was the announcement that a group backed by BlackRock and Citadel Securities is planning to launch a new national stock exchange in Texas, challenging their dominance.

If this venture is successful, it would harm the much smaller Cboe faster than the NYSE and the Nasdaq. In addition, a notable part of Cboe’s business is ETF listing; the fact Texas exchange being backed by the largest ETF manager in the world, BlackRock, does not bode well for Cboe.

All in all, between a potential hit to earnings coming from Dallas, a “Sell” rating given to Cboe by J.P. Morgan analysts, and most technical indicators flashing red, we find it prudent not to “fight the market” and sell the stock.



New Sell 2: Textron (TXT)

Textron, Inc. is a multi-industry company, operating in the aircraft, defense, industrial, and finance businesses worldwide; it is best known for its Bell helicopters and Beechcraft and Cessna aircraft brands.

Textron is a well-capitalized and robustly profitable company; it is one of the Smart Portfolio’s longest-held stocks, purchased in November 2023. It has seen some ups and downs since then, surging to an all-time high in April though afterward it gave back a large part of the gain.

The stock was under pressure in the past two months as investors grew concerned about the earnings and revenue miss reported for Q1 2024, which contrasted with its rich valuation at the time. On the earnings call, TXT management also announced significant job cuts under a restructuring plan, as it grapples with lower demand for specialized vehicles and fuel systems, as well as a cancellation of some programs by the U.S. Army.

While most Wall Street analysts are still optimistic about Textron’s prospects over the next 12 months, its technical indicators are flashing “Strong Sell”. Besides, the company’s director sold more than $1 million worth of shares last month, putting a question mark over the management’s confidence in the company.

The Smart Investor portfolio holds another Aerospace & Defense company, General Dynamics (GD), which has been performing much better than Textron lately. While we may revisit TXT in the future, for now, we view it as prudent to lock in the gains and sell the stock.



Portfolio Stocks Under Review

❖ PayPal (PYPL) is placed under review as we assess the potential impact of Apple’s introduction of new features simplifying money transfers and expanding BNPL options. Although we believe that PayPal’s new management is capable of dynamizing the payments giant once again, and we have welcomed the news regarding its AI-powered advertising business plans, we have yet to see a strategic turnaround that would help it increase free cash flows and maintain (much less grow) its market share.

❖ Stellantis (STLA) is placed under review following several unfortunate events that had some analysts (such as BofA) reduce their price targets on the stock. The company was forced to recall over one million vehicles due to problems with software connected to the rearview camera. The scale of the recall spooked investors as it comes just two weeks after a recall of 200,000 SUVs and trucks over a much more serious stability control malfunction. However, we positively view a recent speech by Stellantis’ CEO, where he admitted to making “arrogant mistakes” in the U.S. operations that have led to bloated inventory and sales decline and expressed confidence in the company’s ability to resolve these issues.



Smart Investor’s Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

The markets rose in the past week, propelled higher by technology leaders. As a result, the Winners’ ranks expanded again: although our Club lost PH again, it welcomes ITT, MCK, and DELL.

The Winners Club now counts 15 stocks: SMCI, GE, AVGO, ANET, TSM, EME, AMAT, ORCL, APH, GD, VRTX, ITT, TPL, MCK, and DELL.

The “fallen angel” PH is now the closest contender for re-entry, with a 27.4% gain since its purchase date. Will it close this minute gap, or will someone else outrun it to the finish line?



Smart Investor Portfolio

 Portfolio 1Y Return
Portfolio Volatility (Beta) Portfolio Dividend Yield
31.43% 1.1 0.85%


New Portfolio Additions

Ticker Date Added Current Price
IBKR Jun 19, 24 $119.74

New Portfolio Deletions

Ticker Date Added Current Price % Change
TXT Nov 29, 23 $85.96 +11.77%
CBOE Apr 24, 24 $169.40 -5.27%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
SMCI Nov 8, 23 $920.01 +260.22%
GE Jul 27, 22 $164.97 +195.22%
AVGO Mar 22, 23 $1802.52 +185.70%
ANET Jun 21, 23 $340.34 +124.63%
TSM Aug 23, 23 $179.69 +91.59%
EME Nov 1, 23 $385.68 +86.89%
AMAT May 31, 23 $247.83 +85.92%
ORCL Dec 21, 22 $144.64 +77.47%
APH Aug 9, 23 $69.73 +57.69%
GD Dec 22, 21 $298.00 +46.25%
ITT Oct 18, 23 $130.95 +37.11%
VRTX Aug 2, 23 $467.28 +34.38%
TPL Jun 5, 24 $767.72 +31.35%
MCK Dec 13, 23 $602.93 +30.46%
DELL Mar 27, 24 $149.15 +30.09%
PH Oct 11, 23 $506.83 +27.41%
CHKP Jul 19, 23 $159.12 +24.98%
CI Jul 12, 23 $334.80 +24.60%
CXT Oct 25, 23 $63.25 +22.20%
HWM Apr 10, 24 $80.20 +21.79%
AIT Dec 6, 23 $188.06 +14.16%
SNX Apr 3, 24 $132.85 +14.10%
STLA Sep 6, 23 $20.40 +12.33%
REGN Feb 7, 24 $1039.11 +10.80%
ADBE May 29, 24 $522.25 +9.16%
DOV May 8, 24 $182.79 +0.53%
KKR Jun 12, 24 $110.48 +0.24%
V May 15, 24 $273.62 -1.48%
AIG May 1, 24 $74.13 -1.57%
EMR May 22, 24 $108.68 -4.42%
PYPL Apr 17, 24 $59.12 -6.79%




What’s Next?

Our next commentary will come out on Wednesday, June 26thUntil then – we wish you a world of investment success!

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