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Online Trading: A Back-Office Stock Breaks Out Knight/Trimark is a market maker for online brokerages. So the more people trade, the better it does Internet stocks fall into two camps at the moment. So-called direct plays, the favorites of day traders, include stocks such as eBay (EBAY), iVillage (IVIL), and Amazon.com (AMZN). They have puny earnings but hefty price-to-earnings multiples -- or would, if they had any earnings. Then there are indirect plays, companies that sell equipment or services to Web publishers or retailers. These are the Ciscos (CSCO) and MCI WorldComs (WCOM) of the world -- companies with real earnings and multiples that are merely unreasonable instead of outlandish. The world of online stock trading divvies up the same way. E*Trade (EGRP) and Ameritrade (AMTD) are two hot direct plays -- stocks that have made feverish runs so far this year even though they'll be lucky to show earnings of pennies a share by the end of next year. By comparison, Knight/Trimark (NITE), a company that's projected to earn $1.69 a share this year and is trading at just under 40 times that figure, is an indirect play that may yet have a little room to run. Knight is a "market maker," the securities industry's equivalent of a warehouse. When investors buy or sell shares, a brokerage firm often taps a market maker's inventory to help complete the deal. The market maker in turn pockets a small portion off the transaction -- say a penny or so for each share changing hands.
Along came Internet trading, and now Knight is making a killing. It turns out that individuals who trade online love to deal -- and make five times as many trades as investors who use more traditional means, according to Forrester Research. So Knight, which is the largest market maker on the NASDAQ, with around 15% to 17% of the exchange's trading volume, has established a sizable following beyond the firms that helped get it started. VOLATILITY IS GOOD. "Take away the business we get from companies with an ownership position, and we'd still be in the top three market makers on the NASDAQ," says Pasternak. The company has also reaped benefits aplenty from a volatile market, where frenzied trading in Internet stocks and an uncertain outlook for corporate profits have kept things churning: Merrill Lynch analyst Judah Kraushaar thinks NASDAQ trading volumes jumped 38% in the first quarter of 1999, vs. last year's fourth quarter. Wall Street obviously thinks that a fast and furious market will continue to help Knight. If it earns the $1.69 a share analysts expect this year, that'll be up 76% from last year's 96 cents. From there, analysts think, Knight's earnings growth could cool to a mere 30% annually over the next five years. All six analysts who follow the stock rate it a buy or strong buy, according to Zacks Investment Research. "Knight is one of the cheapest ways to tap the Internet trading boom," says James Ellman, portfolio manager for the AIM Global Financial Services Fund. "And so far, analysts have been raising earnings estimates, which we like to see."
And should the stock market retreat? Ironically, a bear market would probably fatten Knight's earnings, at least as long as investors scrambled to bag profits while the bagging was good. Says Kraft: "If this market goes haywire, Knight's earnings are going to increase, not decrease." Heads it wins, tails it wins. Why not? After all, this is the Internet. James Anderson, teaches journalism for the City University of New York. He writes the Sector Scope column every other Monday for Business Week Online's Daily Briefing _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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 Street Wise appears every Thursday on e.biz | ||||||||||||
