1 Growth Stock to Buy When the Market Is Volatile

2022 is off to a rough start for investors, particularly those holding high-growth technology stocks, with the Nasdaq 100 index losing almost 19% year to date at Thursday morning's prices. But the sell-off extends back to November, and many popular individual stocks have collapsed into bear-market territory.

It's always best to take a long-term view, as history proves it's the winning formula for producing the best returns. But now might be a good time to look at companies that tend to benefit from broad market volatility.

Adding a stock like Interactive Brokers (IBKR 2.31%) to your portfolio can offer some stability during uncertain times, as it earns commissions based on trading volume, and hence outperforms during times of heightened market activity. The company has a strong record of growth, and its stock is attractively priced right now.

Image source: Getty Images.

Thriving in crazy times

Interactive Brokers' business has gone from strength to strength over the past two years amid the wild trading activity early in the pandemic -- where the S&P 500 index lost almost 40% of its value and recovered it all, and then some -- and the meme-stock frenzy. The favorable conditions helped the company deliver record operational results in both 2020 and 2021.

On Jan. 1 2020, Interactive Brokers had a total of 689,900 client accounts after 42 years in business. And then, between that moment and Dec. 31 2021, it added a whopping 986,500 new clients, accelerating its progress beyond anything it had seen before, and bringing its total to 1.67 million by the end of the year. 

Naturally, more clients means more cash in accounts, and more trading volume. 

Data source: Interactive Brokers. 

The effects of the pandemic and the meme-stock frenzy are made obvious by the significant difference in client equity and stock trading volume in January 2020, and then January 2021, coinciding with the increase in accounts. While trading activity has tapered off since those wild periods, volume was still nearly double in January 2022 compared to the pre-pandemic month of January 2020. 

And there's evidence that the recent market sell-off has spurred another spike in growth for Interactive Brokers. The company added an average of 43,700 new client accounts per month during the last six months of 2021, but in November, when the sell-off began, it added 54,600. And 2022 is off to a hot start, with 49,300 added in January. 

Record financial results

As would be expected, the above metrics have translated into strong financial growth, particularly in earnings per share.

Data source: Interactive Brokers. CAGR = Compound Annual Growth Rate.

Analysts are predicting further strength in 2022, with $2.9 billion in revenue and $3.63 in earnings. While that indicates lower overall growth rates compared to prior years, there is upside potential should market volatility remain elevated. 

That could be exacerbated by the fact that investors appear to have a rapidly increasing appetite for risk. In 2021, Interactive Brokers reported a 40% increase in margin loans, which is money it has loaned to customers to purchase stocks. Not only does the company charge commissions on the total transaction amounts, but it also earns interest, which is a recurring form of income.

But if the market sell-off gathers further momentum, risk appetite might unwind which could be damaging to this segment of Interactive Broker's business. If clients are more cautious, they borrow less, which shrinks transaction volume and recurring interest income. And in the event of a rapid decline in stock prices, client accounts can move into negative balance territory, which means they owe Interactive Brokers money. If those clients can't cover their losses, it could be left to Interactive Brokers to foot the bill, which creates an existential risk (although a remote one, thanks to tight controls). 

Why the stock is a buy

Investors can take comfort in the experience of Interactive Brokers with its four decades of history, compared to a popular new competitor like Robinhood Markets, which is losing significant amounts of money with dwindling growth across its business.

Based on Interactive Brokers' $3.24 in earnings per share in 2021, it trades at a price to earnings multiple of 19.4 at Thursday's prices. That's cheaper than both the Nasdaq 100 index and the S&P 500 index at recent prices.

While the current market sell-off isn't quite as dramatic as what transpired at the height of the pandemic, it's certainly an environment where Interactive Brokers could thrive. Given that volatility could persist during 2022 on the back of interest rate increases and geopolitical tensions, the stock is a great addition to any portfolio right now, especially considering its discounted price compared to the overall market.