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Here's the Next Stock I'm Going to Buy

By Dave Kovaleski - Jun 24, 2021 at 9:26AM

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The stock price was up 54% in 2020, and it had record revenue in the first quarter of 2021.

Just about this time last year was one of the best times to find really good stocks at great values, as the pandemic had hammered the market. Those who jumped in and grabbed some of the great deals were happy they did as the market rebounded from the pandemic lows.

More recently, the stock market has had its share of ups and downs this year as the U.S. comes out of the recession. Stock traders have been dealing with inflation, the continuing effects of the pandemic, and overinflated valuations, particularly in the technology sector. That has made finding good deals on growth stocks a bit tougher.

However, it's still a good time to be a value investor, as value stocks have performed relatively well. One great value that I'm currently eyeing is Virtu Financial (VIRT -0.23%).

Smiling person sitting on stairs, holding phone.

Image source: Getty Images.

Virtu thrives on volatility

Virtu Financial is known as a market maker, which is a company that provides liquidity for financial markets through its high-frequency trading platform. It does this through its ability to quickly take trades, making money on the spread between the buy and sell price for each trade. Times of high volatility are good for Virtu, as there is more trading activity, the spreads widen, and its market-making services are more in need to keep liquidity in the markets.

So, if you consider the volatility that we've seen over the past 12 to 18 months, you'll understand that this has been a strong year for Virtu. The numbers bear that out. In 2020, revenue rose 113.5% to $3.24 billion while net income jumped to $1.1 billion, up from a net loss in 2019, which had a lot to do with acquisition costs to buy ITG. That acquisition gives Virtu another revenue stream -- execution services, providing investment professionals with analytics and trading solutions. As a result, the stock price soared 54% in 2020.

In the first quarter of 2021, Virtu had a record quarter as market volatility continued. Revenue was up slightly from the first quarter of 2020, which was a record quarter. Revenue from market making was about the same, but the company got a 12% boost in revenue from the execution services segment year over year. The stock price is up about 10.8% so far in 2021.

A good buy, now and down the road

While its strong performance in the past year or so has been juiced by heightened volatility, Virtu is a company with solid long-term prospects. There are a few reasons why this may be the next stock I buy. One, it is available at a great valuation right now with a low price-to-earnings ratio of 5.4. It is also very efficient, with a 64% return on equity and a 46% operating margin, and with lots of cash on hand -- about $6.3 billion -- and manageable debt levels.

Another big reason I like Virtu is that it stands to benefit from the rapidly changing markets. With the ease of investing brought on by electronic trading platforms like Robinhood, as well as zero-commission trading becoming widespread, the markets have been opened up to millions of new investors. So, what we've seen in the past year is less a spike and more of a long-term trend, as CEO Douglas Cifu explained in the most recent earnings call

"While it is difficult to estimate the levels at which these activities will continue compared to the recent past, we are confident the underlying trends will remain in place, supported by Virtu and a robust market ecosystem capable of handling this level of extraordinary activity," Cifu said on the call.

Finally, the acquisition of the execution services business gives Virtu another revenue stream to smooth out earnings when markets are less volatile. Its execution services business, like its market making, are among the leaders in the industry.

I like Virtu's value and I like where it's positioned in an industry that is rapidly changing, which is why this might be the next stock I buy.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Virtu Financial, Inc. Stock Quote
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