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KCG Holdings, Inc. Message Board

  • cash.mccall cash.mccall Nov 17, 2012 12:35 AM Flag

    Knight the investment of a lifetime

    I have been a buyer of Knight since shortly after the trading Error. I will give you brief reasons why and then why this is THE stock to own.

    1) Knight is fundamentally sound. All business units are #$%$ well. The Market Maker unit is the damaged unit but clients are back.
    2) Knight had no trouble getting suitors or money following the trading accident. This gives a lot of insight into how important Knight is. They didn't even have to solicit. The money came to them.
    3) Market Making is complex business and is virtually impossible to replace or build from scratch so KCG has great business model.
    4) KCG was saved by its founder. Founders always have guts and try to save the company. Their honor is involved and this is no exception. Money in got convertible to Common A shares so this company was serious about preserving shares.
    5) KCG hire big blue to work with their software. They also fired the guy that screwed up the software by loading old software code stupidly.
    6) Company now has a lot of forward going carryover losses which any profitable company would love to have. Especially since the Knight units are performing well again.
    7) This is a 15 dollar stock selling for $2.5. The only situation that exists is the additional dilution from the capitalizers. Still the company will be in better shape going forward.
    8) Einhorn loaned the company 17 million at 3.5%. Einhorn is careful and has no interest in losing money. He likes the business.
    9) SEC continues probe. Not a big deal, to be expected. They want to make sure that Knight has the proper stops in place to avoid another such accident. This was an accident that came into the trading floor from a third party and that software failed. And there was human error in not realizing the problem This is where the old software failed.It was not by intent, it was an accident and Knight has bridged the software with new systems to warn. In fact, Knight having gone through this is in much much better shape than their peers. It is like an airline that has had a crash is far more likely to not have another one than a firm that has never had a crash. People are on their toes at all times.
    10) Nobody is going to wait until the SEC probe is over. It is obvious that Knight has survived and that SEC was satisfied that it was an accident and they are now making doubly sure that Knight had adequate safeguard and were not negligent in this regard. Safe guards do not portend negligence if the accident unwound the safeguards. Even so, the KCG has complied fully with SEC and should expect fair treatment.
    11) KCG is way under valued. and attractive to at least six firms that would love this unit. The question is not when but who will try to take it.
    12) I value the shares with good will at $10 share minimum. If you look at the enterprise value and the carry over loss as good will, the deal at $10 is nearly free to the right suitor. As Buffett would say, this is the kind of company where you could pay 2X or 3x and still get a bargain. So this is a fantastic deal.

    I have noticed on this board some of the usual degenerates running their mouths and all I can say is that it is too bad you are here. This stock is a gem. I expect it to go for 10 to 15 dollars a share and the suitor will retain all units intact. My preference would be a stock deal over a cash deal because these companies in this area are hugely profitable and the backbone of the massive high volume exchanges of the future. These businesses are indispensable.

    Hard to time these stocks but this one will pop soon. There is some speculation that a deal is underway with Getco who owns about 16% of the KCG at this moment. There are some restrictions on the convertible shares for execution to common A. Those are price related. Those holders are gong to want to make substantial numbers so they will want to convert. These are details. The key is to the right suitor that has a lot of income, these carryover losses are money in the bank so they are not a negative liability.

    My background is in Tax Merger and Acquisitions and this is a sweet deal for everyone. It could be structured for the right suitor to be simply irresistible. My own opinion is that it is far to attractive a target to not stimulate some healthy offers from big players like Goldman or JPM or even TD Ameritrade. TD Ameritrade is a client of KCG they do neary 3 billion a year with income of nearly 600 million a year. Ideal sized suitor. They could wipe out half their net income in one year and if they did a stock deal, they could go at 10 to 15 a share and make a killing on the deal.

    Sentiment: Strong Buy

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