If there is a silver lining to this stock market swoon, it's that there are a lot of good companies that have seen their valuations sink below their intrinsic value. No one knows if this latest market downturn has hit bottom. Some might have thought it did at the end of last year, but that was obviously not the case. But, eventually, the market will bounce back and undervalued stocks should rise right along with it.
One of those undervalued stocks has admittedly taken a hit in recent months and is trading down almost 32% from 52-week highs. But Virtu Financial (VIRT 0.44%) has solid fundamentals and growth prospects which make it look like a good buy at its current valuation.Let's find out a bit more about this stock.
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Virtu tends to thrive on market volatility
Virtu Financial is what is known as a market maker. That means it provides liquidity to markets and exchanges to facilitate trading. The more volatile the market, the more securities are traded, and the more liquidity is needed to facilitate the trades through market makers like Virtu.
Another way to explain it is to note that Virtu does well when the markets are volatile and there is a lot of trading activity. That's because the firm makes money on the spread between the buy and sell price for each trade. When markets are volatile, the spread tends to get wider, which means more profit for Virtu. Plus, there's just simply more trading and opportunities for revenue.
So here we are in 2022 with the S&P 500 index currently down about 14.5%. The broad index briefly touched bear market territory (down 20% or more) in early May, but it is making some effort to bounce back.
Volatility typically is higher the lower the market goes, as people are buying and selling more. But that divergence didn't really take hold in the first quarter, as volatility was actually down year over year. This resulted in Virtu's quarterly revenue falling about 31% year over year to $703 million.
Volatility, as measured by the Cboe Volatility Index (VIX), is currently about 26.5, which is certainly a jump from its level a year ago at around 17. The 52-week high for the VIX is 38, hit back in March, while the 52-week low is 14, which occurred last July. In past market swoons, the market generally began to turn around when the VIX exceeded 40. The VIX has come close to 40 but hasn't exceeded it yet, so it's not clear whether the bottom is still to come or if the rally is already underway.
Either way, volatility has picked up in the second quarter, and analysts believe it will continue as either the rally has already begun or the market reaches bottom soon and capitulation begins. As for the fortunes of Virtu, keep an eye on that VIX Index.
Signs point to value
Virtu stock is trading down about 10.2% year to date. That's not great but beats the performance of the S&P 500 (down 13.8%) and the Nasdaq Composite (down 23.2%) over the same timeframe, which is more than a lot of other fintechs can say.
But some of the key metrics that indicate an undervalued stock are flashing for Virtu right now. Since Virtu reported earnings on April 28, the stock price has dropped about 23.4% to its current price around $26 per share. That has brought down its forward price-to-earnings (P/E) ratio from about 12 at the end of the quarter to its current 8.75.
Further, its price-to-book (P/B) ratio has dropped from 2.5 at the end of Q1 to its current 1.9, while its return on equity (ROE) has climbed from 19% at the end of the quarter to its current 33%. When the P/B drops and the ROE rises, that indicates a stock that is undervalued. In addition, it has a low debt-to-equity ratio of just over 1, which means that its long-term debt in relation to its assets is relatively low, making it less risky.
Overall, given its low valuation and its growth expectations as market volatility picks up, Virtu looks like a good cheap stock right now.
