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. The institutions began as partnership firms focused on initial public offerings (IPOs), and secondary market offerings, brokerage, and mergers and acquisitions. The firms 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 mergers and acquisitions, 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 (SEC) and the Financial Industry Regulatory Authority (FINRA).
The passage of the Dodd-Frank Act of 2010, post the 2008 financial crisis, imposed restrictions on certain investment-banking activities such as proprietary trading. However, considering the need for better business flexibility in the current economic scenario, the restrictions are being eased.
Some of the prominent stocks in this industry are Goldman Sachs (GS - Free Report) , Charles Schwab (SCHW - Free Report) and Raymond James Financial (RJF - Free Report) .
Here are the three major themes in the industry:
- Client activity in the trading business depends on the prevalent macroeconomic and geopolitical conditions. Although the year began on a positive note, the coronavirus pandemic and concerns surrounding its impact on the economy resulted in volatile market performance, leading to a surge in client activities, significantly toward the tail end of the first quarter and continuing at a slower pace. Though the Federal Reserve’s accommodative-monetary policy stance and global economic slowdown worry investors; strong equity markets are providing some respite and are expected to do the same throughout this year. Therefore, an expected upswing in activities and resilient investor sentiment might keep the trading business momentum alive in the period ahead.
- M&A activities, which form an important part of the investment-banking business, are likely to be subdued on decreasing corporate earnings due to the continued impact of the coronavirus crisis. Also, a slowdown in economic growth and interest rates being reduced to near-zero level by the Fed in order to support the U.S. economy from the coronavirus outbreak-induced slowdown are expected to impact the M&A deal volume. Nevertheless, heightened IPO activities on strong equity markets along with improvement in debt markets are likely to be favorable for investment banks in the quarters ahead.
- Innovative trading platforms, investments in technology and advertising are projected to support the overall backdrop for investment banks. Firms 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 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 #49, which places it in the top 19% 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 strong 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 April 2020, the industry’s earnings estimates for the current year have moved north by 17.5%.
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 but Lags S&P 500
The Zacks Investment Bank industry, a 19-stock group within the broader Finance Sector Sector, has outperformed its sector but lagged the S&P 500 over the past year.
While the stocks in the industry have collectively gained 9.7%, the Zacks S&P 500 composite has risen 20.3%, while the Zacks Finance sector has lost 5.1%.
One-Year Price Performance
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 2.03X, below the median level of 2.37X, over the past five years. This compares with the highest level of 3.35X and the lowest level of 1.4X 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 13.83X and the median level is 9.53X.
Price-to-Tangible Book Ratio (TTM)
The Zacks Finance sector’s trailing 12-month P/TBV ratio of 3.42X and the median level of 3.48X for the same period are above the Zacks Investment Bank industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
Market volatility-driven growth anticipated in the trading business 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 investment banking business is likely to prosper on increased IPO activities.
One should particularly consider betting on investment bank and broker stocks that display an upbeat earnings outlook. We are presenting three stocks currently carrying a Zacks Rank #1 (Strong Buy) and two stocks with Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
5 Investment Banks to Bet on
Cowen Group, Inc. (COWN - Free Report) : Shares of this New York-based bank have gained 37.4% in three months’ time. The Zacks Consensus Estimate for 2020 EPS more than doubled in the last 60 days. The company currently sports a Zacks Rank #1.
Price and Consensus: COWN
Morgan Stanley (MS - Free Report) : Shares of this New York-based bank appreciated 14.7% in the past three months. The consensus estimate for current-year EPS has climbed 28.2% over the past 60 days. The company flaunts a Zacks Rank #1 at present.
Price and Consensus: MS
TD Ameritrade Holding Corporation (AMTD - Free Report) : The ongoing fiscal-year consensus estimate for EPS for this Omaha, NE-based bank moved 21.7% north in 60 days’ time. The Zacks Rank #1 stock has lost 1.2% over the past three months.
Price and Consensus: AMTD
E*TRADE Financial Corporation (ETFC - Free Report) : The stock of this Arlington, VA-based bank has appreciated 15.3% in the past three months. The consensus estimate for current-year EPS has moved 18.9% upward in the last 60 days. The company currently has a Zacks Rank #2.
Price and Consensus: ETFC
Interactive Brokers Group, Inc. (IBKR - Free Report) : Shares of this Greenwich, CT-based bank gained 23.6% in three months’ time. The Zacks Consensus Estimate for ongoing-year EPS was revised 26.9% upward in the last 60 days. The company currently has a Zacks Rank #2.
Price and Consensus: IBKR