Mr. Grondahl: I follow a broad selection of financial services companies, with a concentration of some housing-related names, including mortgage insurance companies MGIC Corp., Radian and Genworth. Other housing-related names include Ocwen, Altisource and DJSP Enterprises (DJSP). Outside of housing-related names, other financial services companies that I follow generally have strong cash generation capabilities and include Ameritrade, Alliance Data Systems, Torchmark (TMK), GATX (GMT) and MoneyGram. It's a very broad approach to financial services, but these companies have good stories, strong management teams and real cash generation potential.
TWST: You have an "underperform" rating on Ameritrade right now. What could lead to an improved performance for Ameritrade?
Mr. Grondahl: I have been "underperform" on Ameritrade for about a year, and the stock has pretty much just gone sideways. So I think it has been the right call. To get the stock moving higher we need to see one of two things for AMTD, and these would be significantly higher trading levels for an extended period of time, but more importantly higher interest rates, as AMTD is very levered to both trading volumes and higher interest rates. For every 25-basis-points change from the Federal Reserve, AMTD's EPS increases 7 cents annualized, and for every increase of 3,000 trades per day, AMTD's EPS increases by 1 cent annualized. AMTD has a strong business model and has operated well in a very challenging environment. And now we are basically waiting for higher interest rates, as AMTD has about $65 billion of assets leveraged to higher interest rates. So even a small increase in interest rates would be meaningful for AMTD.
Tickers included in this excerpt: ADS, AMTD, ASPS, BCS, GNW, MGI, MTG, OCN, RDN
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