Interactive Brokers Group, Inc. (IBKR), TD Ameritrade Holding Corp. (AMTD): These Stocks With Hidden Pockets Of Cash May Benefit From Rising Rates

Page 1 of 2

The notorious bank robber Willie Sutton said he robbed banks “because that’s where the money is.”

His words came to mind while I was thinking about which companies might benefit from rising interest rates. Certainly, banks have large cash balances, and for that reason, along with others — many of which were laid out recently by my colleague David Sterman — those institutions could be among the prime beneficiaries of soon-to-come higher interest rates.

I realized there are other pockets of hidden cash, less obvious than banks, that might benefit as much or more than banks when it comes to profiting from rising interest rates.

What other businesses have been sitting on huge sums of cash they can’t spend? Which companies have been forced to earn next to nothing in the form of interest — but should see a significant boost in their income streams as rates rise?

Two came to mind. The first category you probably do business with often — broker-dealers. They clear customer transactions, carry customer accounts and hold customers’ cash and securities.

The second below-the-radar group: payroll processors. These companies handle all paperwork, taxes and withholdings on paychecks, among other services. They hold the funds until the checks clear or are deposited in employees’ accounts.

In addition to fees for services, brokerages and payroll processors both earn interest on the float from client funds. Typically, these funds are invested to maximize interest income and minimize volatility, which means the majority of funds are invested in Treasurys and other government securities with a maximum maturity of 10 years. Most use a laddering strategy to extend the maturities of the investment portfolio and employ short-term financing to handle short-term funding requirements. This allows the companies to average their way through an interest rate cycle and reduce fluctuations in yield.

Laddering exposes the companies to interest rate risk as proceeds from maturing securities are reinvested. While higher yields translate directly to higher income, higher rates increase interest costs on short-term debt.

Overall, both industry sectors are cyclical — and both depend upon a healthy, improving economy to keep growing. If you believe a recovery in the U.S. is indeed underway and will continue for several years, then both these industry sectors should do well — brokerages as do-it-yourselfers join the ranks of investors, and payroll companies as companies start adding new jobs.

In addition to huge piles of cash, there needs to be a few other things to recommend a company. So I consider price-to-earnings (P/E) ratios, dividend yield and a few other metrics to compare among peers in search of bargains.

In looking at brokerages, it’s my opinion that Interactive Brokers Group, Inc. (NASDAQ:IBKR) is significantly undervalued compared to its peers, TD Ameritrade Holding Corp. (NYSE:AMTD), E TRADE Financial Corporation (NASDAQ:ETFC) and Charles Schwab Corp (NYSE:SCHW). Its share value is on the lower end of this range, although it was comparable a year ago. In addition, its P/E is low, and it has one of the lowest debt-to-equity ratios but the highest operating margin and dividend yield.

Interactive Brokers Group, Inc. (NASDAQ:IBKR)’s brokerage segment recently scored a record-breaking quarter with $123 million in pre-tax profit, a 37% increase from a year ago. The company’s pre-tax profit margin climbed to a new high of 58%, but this performance may have been obscured by the lackluster performance of Interactive’s market-making unit, which earned only $7.6 million.

Interactive Brokers Group, Inc. (NASDAQ:IBKR) has a unique growth strategy as it focuses on savvy active traders and investors. It is doing well in that respect, as its average monthly account growth for the first six months of this year is 2,400, outpacing last year’s monthly average of 1,700. No less an authority than Barron’s has rated Interactive at the top of its field two years in a row.

In contrast to the splashy world of online brokerages, payroll processing can be an overlooked industry. But with the labor market improving, companies need to process more employee data and paychecks than before.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!