The Smart Money is Divided on This Stock: Investment Technology Group (ITG)

In sports, being the weakest member of a weak conference is doubly insulting.  Not only is the team bad, but the same team could not beat out other mediocre teams.  Applying this analogy to the stock market of the past 3 years, you might just come up with Investment Technology Group (NYSE:ITG) as being the analogous aforementioned cellar dweller.  Since the stock market meltdown of 2008, the financial sector has notably trailed the subsequent comeback of the S&P 500.  Within the broad financial sector, those companies directly tied to the capital markets, trading, and brokerages have been even weaker relative performers. For investors not already using market-beating strategies like these, this presents an obvious problem.

Digging further within this group, ITG’s price performance has been sadder still.  From pre-crash 2008 levels of the mid $40s to $50s, ITG fell into a trading range from the mid $20s to the high teens for the rest of 2009 and 2010.  As the broad market stabilized and then rose, ITG continued slipping; the issue fell to new lows in the high $7s before riding the back of a broad financial sector rebound starting in late 2012. The stock now sits in the $11 range.

The weakness in ITG has been brutal but hardly surprising.  The company offers a broad range of execution broker, trade analysis, and research services to global portfolio managers.  Buffeted by negative domestic fund flows since the crash, the company’s top line has been decimated.  Yearly total revenue has fallen from the $750 million level in 2008 to $500 million for 2012. Trading volumes executing through ITG have been essentially flat since 2009.  Recently announced fourth quarter 2012 earnings reflected these trends; adjusted quarterly net income fell to $0.02 per share from $0.07 and revenue fell to $121 million from $130 million.

However, problems with top line revenue have not been necessarily endemic to financials over the last several years.  Looking across a cross section of financials, top lines have often grown. FXCM Inc. (NYSE:FXCM), a currency brokerage for retail and institutional customers, has grown revenue about 30% since 2009.  Gamco Investors Inc. (NYSE:GBL) and Jefferies Group, Inc. (NYSE:JEF), investment houses offering a wide range of brokerage related services, saw revenues rise nearly 50% and 40% respectively since 2009. NASDAQ OMX Group, Inc. (NASDAQ:NDAQ)’s flat revenues over the same period seem downright impressive compared to ITG’s.

What should investors do going forward?