5 Top Stocks From the Prospering Investment Bank Industry
12 min readThe Zacks Investment Bank industry is aided by market volatility-driven growth in the trading business, which might not continue for long as volatility is likely to wane once the coronavirus outbreak-led issues stabilize. Also, expenses on technology and business diversification might impede top-line growth in the upcoming period.
Nonetheless, the industry players will continue to benefit from rise in IPOs and improved M&A activities, which will keep fueling revenue growth. Thus, some of the industry players like Charles Schwab (SCHW), Goldman (GS), Interactive Brokers (IBKR), Evercore (EVR) and Moelis & Company (MC) are poised to benefit from these developments.
Industry Description
The Zacks Investment Bank industry consists of U.S. firms that provide various financial products and services, including advisory-based financial transactions to corporations, governments, and financial institutions worldwide. These initially started as partnership firms focused on initial public offerings (IPOs), and secondary market offerings, brokerage, and mergers and acquisitions (M&As), and gradually have evolved into providers of various services, including securities research, proprietary trading and investment management.
The firms work mainly through three product segments — investment banking (which includes M&As, advisory services, and securities underwriting), asset management, and trading and principal investments (which covers proprietary and brokerage trading).
An advisor providing investment-banking services in the United States must carry a broker-dealer license and abide by the regulations of the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority.
3 Investment Bank Industry Trends to Keep an Eye On
Strong Client Activities to Support Performance: Client activity in the trading business depends on the prevalent macroeconomic and geopolitical conditions. The coronavirus pandemic and its lingering concerns, along with vaccine breakthroughs and the U.S. Presidential elections, continue to give rise to volatile markets, prompting a surge in client activities. Though the global economic slowdown worry investors, an anticipated upswing in activities on optimism regarding the COVID-19 vaccine, new political regime, resumption of normal business activities, and resilient investor sentiment might keep the trading business momentum alive in the period ahead.
Investment Banking Business to Prosper: While M&A activities (which form an important part of the investment-banking business) slowed down initially in 2020, mainly due to the coronavirus pandemic and resultant uncertainty, the same has been rebounding gradually since the end of June. Furthermore, the trend will likely continue in the near term on resumption of normal business and gradual economic recovery. Also, heightened IPO activities and follow-on equity issuances, driven by strong equity markets, along with improvement in debt markets (mainly due to low rates) is likely to continue in the quarters ahead. These will, thus, support investment banks’ financials.
Digitization on an Upswing: Innovative trading platforms, investments in technology and advertising are projected to support the overall backdrop for investment banks. The industry players are emphasizing on attracting and retaining the best talent for building a leadership team and spending on technology to support clients with the development of infrastructure and new platforms.
Zacks Industry Rank Indicates Solid Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects.
The Zacks Investment Bank industry currently carries a Zacks Industry Rank #17, which places it in the top 7% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a stellar earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually building up confidence in this group’s earnings growth potential. Since the end of January 2020, the industry’s earnings estimates for the current year have moved4.2% north.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Investment Bank industry, a 17-stock group within the broader Zacks Finance Sector, has outperformed its sector and the S&P 500 over the past year.
While the stocks in the industry have collectively gained 27.3%, the S&P 500 composite has rallied14.9%, while the Zacks Finance sector has lost 0.7%.
One-Year Price Performance
Industry’s Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 2.73X, above the median level of 2.26X, over the past five years. This compares with the highest level of 3.20X and the lowest level of 1.35X over this period.
However, the industry is trading at a discount, when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 16.66X and the median level is 10.94X.
Price-to-Tangible Book Ratio (TTM)
The Zacks Finance sector’s trailing 12-month P/TBV ratio of 3.73X and the median level of 3.55X for the same period are above the Zacks Investment Bank industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
5 Investment Banks to Bet On
Charles Schwab: Headquartered in San Francisco, CA, Charles Schwab is a savings and loan holding company, providing wealth management, securities brokerage, banking, asset management, custody and financial advisory services. The company’s opportunistic acquisitions over the past years will likely strengthen its position as a leading brokerage player.
Though the company’s net interest margin might be strained as the Fed signalled no change in the near-zero interest rates till 2023, with aggressive efforts to fortify client base in advisory solutions, a low-cost capital structure supporting capital deployments and initiatives to augment trading revenues will continue boosting profitability.
The Zacks Consensus Estimate for 2021 earnings has moved 6.1% north to $2.61 over the past month. The stock presently carries a Zacks Rank of 2 (Buy). Shares of the company have climbed 73.6% over the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SCHW
Goldman Sachs: This Zacks Rank #1 stock operates as an investment banking, securities, and investment management company globally. Based in New York, the key source of Goldman’s earnings stability is its business diversification. Markedly, the company has been undertaking initiatives to boost the GS Bank’s business with acquisitions and expansion moves.
Notably, in the current era of digitization, the bank acquired the online deposit platform of GE Capital Bank in April 2016 and also launched a digital consumer lending platform — Marcus by Goldman Sachs. Additionally, the company is likely to benefit from its exposure to the fast growing exchange-traded funds (ETF) market.
Recently, Goldman Sachs entered into a deal to take over General Motors Co.’s credit-card portfolio. The bank targets to expand its consumer loans portfolio to $20 billion in the coming years.
Successful expense-reduction efforts, robust underwriting and trading business, and steady capital-deployment activities are the key driving factors for Goldman. Its shares have rallied 42.2% over the past six months. The Zacks Consensus Estimate for current-year earnings has moved up7.8% to $26.46, over the past 30 days.
Price and Consensus: GS
Interactive Brokers: This Zacks Rank #2 company operates as an automated global electronic market maker and broker. The company specializes in routing orders, besides executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 135 electronic exchanges and market centers worldwide.
Since its inception, Interactive Brokers has been chiefly focusing on developing proprietary software to automate broker-dealer functions, which has resulted in steady improvement in the topline. Unlike other companies in the same space, which hike dividends at frequent intervals, Interactive Brokers has been consistent with its dividend payment for a long time and uses no debt to finance its operations.
Though rising non-interest expenses is a deterrent, the company has continued to explore opportunities in the emerging markets of Taiwan, Mexico and India to diversify its operations and gain revenue stability. Recently, with an aim to further strengthen its position in the online brokerage space, Interactive Brokers inked a deal to acquire Folio Investments Inc.’s “self-directed” retail brokerage division. The terms of the deal, expected to close in January, remain undisclosed.
Shares of the company have rallied 34.1% over the past six months. The Zacks Consensus Estimate for ongoing-year earnings has moved 3.4% north to $2.41for 2021 in 30 days’ time.
Price and Consensus: IBKR
Evercore: Headquartered in New York, Evercore is a premier global independent investment banking advisory firm, which operates from its offices and affiliates in North America, Europe, the Middle East and Asia. Evercore’s efforts to grow investment banking business bode well for the long term and are anticipatedto stokerevenue growth. Also, steady capital-deployment activities remain a positive factor.
Though falling volatile institutional assets under management (AUM) trend on account of foreign-exchange fluctuations, along with rising expenses remain concerns, the company’s efforts to boost its client base in advisory solutions, coupledwith geographical expansion efforts, are tailwinds.
Shares of this Zacks Rank #1 stock have surged107.6% in six months’ time. The Zacks Consensus Estimate for this year’s earnings has moved 4.7% north to $8.64 in the past month.
Price and Consensus: EVR
Moelis & Company: This Zacks Rank #1 stock is a global investment bank, providing strategic and financial advisory services to corporations, governments and financial sponsors across all major industries. Based in New York, the company serves clients with the help of more than 550 advisory professionals, who are based in 20 locations across the Americas, Europe, the Middle East, Asia and Australia.
Moelis & Company’s global expansion initiatives and solid M&A activities bode well for the future. The company’s capital-deployment actions reflect a healthy balance-sheet position. Though the bank is witnessing persistent rise in expenses, its business is significantly diversified across various sectors and geographically having no any meaningful client concentration. Furthermore, its alliances in Japan and Mexico, as well as non-controlling stake equity in Moelis Australia Limited, offer support.
Its shares have appreciated75.6% in the past six months. The Zacks Consensus Estimate for 2021 earnings has been revised12.8% upward to $2.65, over the past 30 days.
Price and Consensus: MC
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The Charles Schwab Corporation (SCHW): Free Stock Analysis Report
Moelis & Company (MC): Free Stock Analysis Report
Interactive Brokers Group, Inc. (IBKR): Free Stock Analysis Report
The Goldman Sachs Group, Inc. (GS): Free Stock Analysis Report
Evercore Inc (EVR): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
