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Why Investment Broker Stocks Might Be a Good Bet Now
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Speculation over the timing of rate hike continues to influence market sentiments with the nearing of the Federal Open Market Committee meeting. While the final move by the Fed at its two day policy meeting (Sep 20–21) remains a key area to watch, recent speeches by several Fed officials reflect a divided stance.
On Monday, at the Chicago Council on Global Affairs, Fed Governor Lael Brainard’s comments reflected a cautionary note. She stated, “My main point here is that in the presence of uncertainty and the absence of accelerating inflationary pressures, it would be unwise for policy to foreclose on the possibility of making further gains in the labor market.” Throwing light on the global concerns, she further added, “Headwinds from abroad should matter to U.S. policymakers because recent experience suggests global financial markets are tightly integrated, such that disturbances emanating from Chinese or euro-area financial markets quickly spill over to U.S. financial markets.”
Among other officials, Minneapolis Fed President Neel Kashkari feels that there is no immediate need of a rate hike, while Governor Daniel Tarullo seeks more evidence of rise in inflation before considering a hike.
However, on Friday, Federal Reserve Bank of Boston President Eric Rosengren had hawkish tone. He said, “My personal view, based on data that we have received to date, is that a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy.” He added, “if we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate.” Other officials whose recent comments reflected a support for rate hike include Cleveland Fed President Loretta Mester and Federal Reserve Bank President of Richmond Jeffrey Lacker.
While mixed opinions are currently ruling the market, we believe several issues including the Brexit-induced uncertainties, U.S. dollar appreciation and the upcoming Presidential election might cause further delay in rate hike. Nevertheless, the continued positive domestic economic factors such as a recovery in job market and increased household spending certainly increase the odds of a hike by the end of this year.
As a rising rate environment boosts the performance of certain industries and hurts others, it is now time for the investors to re-adjust their investment portfolios. The investment brokerage space typically benefits from a rising rate environment, so it could be a good industry to explore for picking stocks now.
Why Eye Brokerage Space?
Currently, out of more than 260 industries on our radar, the Investment Brokerage space has a Zacks Industry Rank of 76 (Top 30%). Amid the unpredictable market conditions, it is important to consider the performance of an industry. This is because, more often than not, a rising tide will lift all boats in an industry, as there can be broad trends taking place in a segment that can boost securities across the board. In fact, studies have shown that an average stock in a strong industry is likely to outperform a great stock in a poor industry.
With a rise in rates, brokerages firms are likely to engage in more investment activities. Investment brokers earn interest income on un-invested cash in client accounts. Therefore, when rates increase, they can invest this cash at higher rates, thereby leading to a rise in interest income.
Brokerage firm like E*TRADE Financial Corp. derives nearly 60% of its total revenue from interest income. Another major brokerage house that stand to benefit is TD Ameritrade Holding Corp. (AMTD - Free Report) , as its business is largely tied with receiving interest on cash which is highly sensitive to short-term rates.
Further, the low rate environment had forced several firms like The Charles Schwab Corp. (SCHW - Free Report) to waive fees in order to maintain positive return for clients. However, the rising rate environment would reverse the trend.
With the help of the Zacks Stock Screener, we have zeroed in on two stocks in the Investment Brokerage space. Both the stocks have witnessed at least 20% positive price movement over the past six months and sport highly desirable Zacks Rank #1 (Strong Buy) or #2 (Buy).
These stocks also have promising Zacks Style Score (Value Score = ‘A’ or ‘B’). Our research shows that stocks with Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 handily beat other stocks.
LPL Financial Holdings Inc. (LPLA - Free Report) : Based in Boston, MA, the company has a long-term expected EPS growth rate of 14.8% and a Zacks Rank #2. The stock with a Value score ‘A’ has gained nearly 33% over the past six months.
Raymond James Financial, Inc. (RJF - Free Report) : The St. Petersburg, FL-based company, which has been in the headlines for its recent acquisition moves, currently has a long-term expected EPS growth rate of 17% and a Zacks Rank #2. This stock gained nearly 23% over the past six months and has Value score ‘B’.
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Why Investment Broker Stocks Might Be a Good Bet Now
Speculation over the timing of rate hike continues to influence market sentiments with the nearing of the Federal Open Market Committee meeting. While the final move by the Fed at its two day policy meeting (Sep 20–21) remains a key area to watch, recent speeches by several Fed officials reflect a divided stance.
On Monday, at the Chicago Council on Global Affairs, Fed Governor Lael Brainard’s comments reflected a cautionary note. She stated, “My main point here is that in the presence of uncertainty and the absence of accelerating inflationary pressures, it would be unwise for policy to foreclose on the possibility of making further gains in the labor market.” Throwing light on the global concerns, she further added, “Headwinds from abroad should matter to U.S. policymakers because recent experience suggests global financial markets are tightly integrated, such that disturbances emanating from Chinese or euro-area financial markets quickly spill over to U.S. financial markets.”
Among other officials, Minneapolis Fed President Neel Kashkari feels that there is no immediate need of a rate hike, while Governor Daniel Tarullo seeks more evidence of rise in inflation before considering a hike.
However, on Friday, Federal Reserve Bank of Boston President Eric Rosengren had hawkish tone. He said, “My personal view, based on data that we have received to date, is that a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy.” He added, “if we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate.” Other officials whose recent comments reflected a support for rate hike include Cleveland Fed President Loretta Mester and Federal Reserve Bank President of Richmond Jeffrey Lacker.
While mixed opinions are currently ruling the market, we believe several issues including the Brexit-induced uncertainties, U.S. dollar appreciation and the upcoming Presidential election might cause further delay in rate hike. Nevertheless, the continued positive domestic economic factors such as a recovery in job market and increased household spending certainly increase the odds of a hike by the end of this year.
As a rising rate environment boosts the performance of certain industries and hurts others, it is now time for the investors to re-adjust their investment portfolios. The investment brokerage space typically benefits from a rising rate environment, so it could be a good industry to explore for picking stocks now.
Why Eye Brokerage Space?
Currently, out of more than 260 industries on our radar, the Investment Brokerage space has a Zacks Industry Rank of 76 (Top 30%). Amid the unpredictable market conditions, it is important to consider the performance of an industry. This is because, more often than not, a rising tide will lift all boats in an industry, as there can be broad trends taking place in a segment that can boost securities across the board. In fact, studies have shown that an average stock in a strong industry is likely to outperform a great stock in a poor industry.
With a rise in rates, brokerages firms are likely to engage in more investment activities. Investment brokers earn interest income on un-invested cash in client accounts. Therefore, when rates increase, they can invest this cash at higher rates, thereby leading to a rise in interest income.
Brokerage firm like E*TRADE Financial Corp. derives nearly 60% of its total revenue from interest income. Another major brokerage house that stand to benefit is TD Ameritrade Holding Corp. (AMTD - Free Report) , as its business is largely tied with receiving interest on cash which is highly sensitive to short-term rates.
Further, the low rate environment had forced several firms like The Charles Schwab Corp. (SCHW - Free Report) to waive fees in order to maintain positive return for clients. However, the rising rate environment would reverse the trend.
FINANCE-INVESTMENT BKRS Industry Price Index
FINANCE-INVESTMENT BKRS Industry Price Index
How to Select the Right Stocks?
With the help of the Zacks Stock Screener, we have zeroed in on two stocks in the Investment Brokerage space. Both the stocks have witnessed at least 20% positive price movement over the past six months and sport highly desirable Zacks Rank #1 (Strong Buy) or #2 (Buy).
These stocks also have promising Zacks Style Score (Value Score = ‘A’ or ‘B’). Our research shows that stocks with Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 handily beat other stocks.
LPL Financial Holdings Inc. (LPLA - Free Report) : Based in Boston, MA, the company has a long-term expected EPS growth rate of 14.8% and a Zacks Rank #2. The stock with a Value score ‘A’ has gained nearly 33% over the past six months.
Raymond James Financial, Inc. (RJF - Free Report) : The St. Petersburg, FL-based company, which has been in the headlines for its recent acquisition moves, currently has a long-term expected EPS growth rate of 17% and a Zacks Rank #2. This stock gained nearly 23% over the past six months and has Value score ‘B’.
Zacks' Best Investment Ideas for Long-Term Profit
Today you can gain access to long-term trades with double and triple-digit profit potential rarely available to the public. Starting now, you can look inside our stocks under $10, home run and value stock portfolios, plus more. Want a peek at this private information? Click here >>