A Pitch for Which Brokerages to Buy
Goldman Sachs Group Inc. analyst Richard Strauss suggested Monday that investors considering brokerage stocks, which have been pummeled in recent weeks, should look at firms such as Morgan Stanley Dean Witter & Co. and Citigroup Inc. that generate profit from a variety of businesses.
Investors should also consider Charles Schwab Corp., the biggest online broker, whose shares are down 50% from their record high, he said.
The brokers “are quite attractive right now, but--especially in this environment--picking the right name is key,” Strauss said in a report. “Stick with proven management and firms offering the most in terms of diversification.”
Brokerage shares have tumbled amid concern that higher interest rates will eat into trading profit and may curb underwriting in the second half of the year. Merrill Lynch & Co., the biggest U.S. securities firm, has fallen 37% from its 52-week high. Online brokerage shares have been hit much harder.
Strauss said big gains from trading in the first half are expected to wane for most firms and that bond yields’ rise to 21-month highs “make that potential outcome more likely.”
That will hurt firms such as Goldman Sachs and Lehman, which typically rely heavily on their fixed-income businesses for profit. By contrast, their counterparts with larger asset management units enjoy a more stable earnings flow.
Morgan Stanley, which has a retail brokerage force of 12,000, earned $879 million in the quarter ended Nov. 30, while competitors lost money following last fall’s global bond rout, Strauss noted.
Citigroup is the biggest financial services company in the world, providing everything from mutual funds and credit cards to investment banking services through its Salomon Smith Barney unit.
Schwab, which focuses on retail stock trading, “is pretty much immune from bond market principal-trading volatility,” Strauss said.
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Battered Brokerages
Many brokerage stocks are well off their peaks. A sampling:
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Ticker Mon. 52-wk 52-wk % decline Company symbol close High Low from high Ameritrade AMTD $20.38 $62.75 $1.88 -68% E-Trade EGRP 23.94 72.25 2.50 -67 Wit Capital WITC 18.13 38.00 9.00 -52 Charles Schwab SCH 38.88 77.50 9.25 -50 TD Waterhouse TWE 15.19 27.25 14.69 -44 Merrill Lynch MER 64.50 102.50 35.75 -37 Morgan Stanley MWD 82.44 116.94 36.50 -30 Goldman Sachs GS 55.81 77.25 55.81 -28 Lehman Bros. LEH 50.31 69.31 22.63 -27 Citigroup C 42.63 51.75 19.00 -18 S&P; 500 index SPX 1,297.80 1,420.14 923.32 -9
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Source: Bloomberg News
