A Buyer May Pierce Knight's Armor

It's easy to see why analysts are scrambling to tag Knight Trading Group (NITE ) as a sell or a hold: Earnings have plunged 94% in the second quarter, and its stock has dived from 25 in early January to 10 on July 25. It may be too late to get out now. But this may be just the time to buy in, argues value investor David Katz of Matrix Asset Advisors. He thinks Knight has an "excellent long-term franchise" and is trading at a fire-sale price. That makes Knight, the largest market maker in the Nasdaq and a leading options trader, vulnerable to a takeover, says Katz. He wouldn't be surprised if previously rumored suitors Lehman Brothers or Goldman Sachs made a new approach to Knight Chairman and CEO Kenneth Pasternak. He has given up the presidency after big shareholders and directors blamed him for poor results this year. It's possible, says Katz, that a European bank might also consider buying Knight. Knight declined to comment on the takeover rumors.

In a buyout, Knight is worth 18 to 25 a share, figures Katz, who reckons that on fundamentals alone, the company is worth 15 to 18, "depending on market conditions." Apart from the market's dismal performance, a recent change of stock quotes from fractions to decimals crimped Knight's earnings as it narrowed the average spread between a buy and sell order.

Richard Bove of Raymond James & Associates, who rates the stock a sell, sees Knight's earnings plunging to 36 cents a share in 2001 from 2000's $2.05, and to 35 cents in 2002.

By Gene G. Marcial

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