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Brokers and Private Equity Lead the Charge

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The financial sector definitely got a face lift since the election for two obvious reasons. First, the yield curve steepened as long-term Treasuries sold off fast and furious.

And this rise in interest rates is generally good for banks and other financial institutions who benefit from a greater net interest margin on their borrowing and lending activities.

Second, there was the overwhelming sense that the new administration would do serious damage to financial regulations like Dodd-Frank, thus clearing the way for unencumbered dealings between investment banking and commercial banking, as well as the removal of other shackles.

Since the election, while the broad S&P 500 index is up just over 6%, the financial sector as represented by the SPDR ETF (XLF) is up nearly 18%.

Banks big and small have lead the charge for the most part for the two benefits mentioned.

But I ran a screen today to see what other strong Zacks Rank stocks were making new highs and the list was surprisingly dominated by two other financial industry groups: brokers and private equity players.

I say "dominated by" because only 21 names made it through my screen and here were 5 of them, all Zacks #1 Rank Strong Buys.

Brokers Make Bank

Did you know that investment brokers also benefit from rising yields? That's because in addition to stock lending and margin interest, they hold lots of assets in customer cash balances that they can earn interest on every night.

For the brokers, it also helps that the strong bull market is making new all-time highs and driving more stock trading commissions and newly funded accounts.

For all these reasons, Wall Street earnings estimates have been rising, making the brokers #15 out of 265 industry groups.

Here were the 3 brokers of the 21 stocks in my screen of Zacks #1 Rank New Highs...

The Charles Schwab Corporation (SCHW - Free Report) is a $54.5 billion investment services firm with $2.73 trillion in client assets. The firm's evolution from a discount broker to a full-service wealth management institution explains that asset base.

Schwab looks poised for 25.6% EPS growth this year based on rising analysts earnings estimates. And the 14.5% revenue growth estimate fueling those projected profits is probably a big part of the reason shares are pushing highs not seen since the year 2000.

The company is expected to hit a record $8.6 billion on the top line this year.

TD Ameritrade (AMTD - Free Report) is a $24.5 billion broker who provides investing and trading services for nearly six million client accounts that total more than $600 billion in assets, and custodial services for more than 4,000 independent registered investment advisors.  

In 2009, TD Ameritrade looked back to its trading roots and acquired thinkorswim Group Inc., which included the fastest-growing brokerage at the time, thinkorswim, a company recognized throughout the industry for its record of innovative technology and sophisticated trading platforms.

TD is already in the 2nd quarter of its 2017 fiscal year where analyst projections are for 8.75% EPS growth and a 7.5% advance on the top line to nearly $3.6 billion.

E*TRADE Financial is a $10 billion broker focused on retail customers and truly one of the pioneers of the discount, electronic model. In fact, they claim to have executed the "first online trade" in 1983. With customer assets of $307 billion (as of Sep 30), E*TRADE has 3.44 million brokerage accounts.

After a gangbusters year of 56% EPS growth (projected for 2016), things are expected to slow down a bit this year to only 3% growth. But revenues are expected to climb 13.7% from $1.94 billion to $2.21 billion.

And E*TRADE may have the most attractive forward P/E valuation at 19.3X compared to the other two brokers at 25X or greater. Growth vs. value... decisions, decisions.

Privately Speaking

Private equity firms are those mysterious investors who make money by financing, buying, and selling whole companies. In a strong bull market where public company M&A is still thriving, it's not surprising to see the PE guys and gals doing well as they take companies public, private, and help them grow at all points in between.

Private Equity firms are found in the Investment Management industry, which ranks #89 out of 265 groups, almost in the upper one-third. Here were the 2 companies that made it through today's screen, Zacks #1 Rank New Highs, that selected only 21 stocks across all sectors...

KKR (KKR - Free Report) , formerly known as Kohlberg Kravis Roberts & Co., is a $7.7 billion provider of asset management and capital markets services to its investors, portfolio companies and clients. As of Sep 30, they held $131 billion in AUM (assets under management).

The company operates private equity funds that take either controlling or strategic minority ownership positions for long-term appreciation; invests in leveraged loans, high-yield bonds and less liquid credit products; and, on behalf of portfolio companies, arranges equity and debt financing and offers capital market advice.

KKR portfolio companies in their private equity funds generate nearly $200 billion in annual revenues as of June 30, 2016 and employ a total global workforce of approximately 720,000 as of December 31, 2015.

They also boast 19 private equity funds launched since inception and $10.8 billion of their own money invested in portfolio companies along side their clients.

Apollo Global Management (APO - Free Report) is a $4 billion global alternative asset manager that operates in three business segments: private equity, capital markets and real estate. It raises, invests and manages funds on behalf of pension and endowment funds, as well as other institutional and individual investors.

As of September 30, 2016, the firm had total AUM of approximately $189 billion, with a team of 974 employees, including 370 investment professionals, located in fifteen offices around the world.

In 2016, Apollo closed two headline deals you may have heard of when they took private Outerwall, the maker of RedBox DVD kiosks, and Rackspace, the provider of cloud computing storage solutions.

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