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5 Stocks to Outshine the Booming Investment Bank Industry

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The Zacks Investment Bank industry is supported by market volatility-driven growth in the trading business, which may not continue for long as volatility is likely to wane once the pandemic and issues related to it stabilize. Also, investments for technological upgrades and business diversification might impede bottom-line growth.

Nonetheless, the industry players will capitalize from improving initial public offerings (IPOs) and mergers and acquisitions (M&A) activities, which will keep fueling revenue growth. Thus, some of the industry players like Morgan Stanley ((MS - Free Report) ), Charles Schwab (SCHW - Free Report) , Interactive Brokers (IBKR - Free Report) , Evercore (EVR - Free Report) and Moelis & Company (MC - Free Report) will 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 IPOs, secondary market offerings, brokerage and M&As, having gradually 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).

3 Investment Bank Industry Trends to Keep an Eye On

Strong Client Activities to Drive Performance: Client activity in the trading business depends on the prevalent macroeconomic and geopolitical conditions. The extensive vaccination drive, additional government spending, expectations of robust economic growth and inflation concern continue to give rise to volatile markets, prompting a surge in client activities. Thus, the momentum in the trading business is likely to stay alive in the near future.

Investment Banking Business to Prosper: M&A activities (which form an important part of the investment-banking business) have witnessed a rebound since the end of June 2020. Furthermore, the trend is likely to continue in the near term on resumption of normal business, excess cash levels 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), are likely to continue in the quarters ahead. These will, thus, support investment banks’ financials.

Technological Upgrades: 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 Rosy 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 #46, which places it in the top 18% 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 beginning of 2021, the industry’s earnings estimates for the current year have moved 41.4% 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 109.6%, the S&P 500 composite has rallied 42.5%, while the Zacks Finance sector has gained 56.3%.

One-Year Price Performance


Industry 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 4.06X, above the median level of 2.32X, over the past five years. This compares with the highest level of 4.08X 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 17.39X and the median level is 11.52X.

Price-to-Tangible Book Ratio (TTM)

The Zacks Finance sector’s trailing 12-month P/TBV ratio of 4.62X and the median level of 3.61X 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

Morgan Stanley: This Zacks Rank #2 (Buy) stock operates as an investment banking, securities, and investment management company globally. Based in New York, the key source of Morgan Stanley’s earnings stability is its business diversification. Markedly, the company has been undertaking initiatives to boost the business with acquisitions and expansion moves.

The buyouts of Eaton Vance and E*Trade Financial are in sync with the company's efforts to focus less on capital markets driven revenue sources. Though steadily increasing expenses and low rates make us apprehensive, a strong balance sheet is likely to continue supporting growth. Also, the company’s robust capital deployments reflect solid liquidity position and will keep enhancing shareholder value.

Its shares have rallied 42.2% over the past six months. The Zacks Consensus Estimate for current-year earnings has moved up 7.8% to $26.46 over the past 30 days.

Price and Consensus: MS

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 are likely to strengthen its position as a leading brokerage player.

The company’s net interest margin might be strained as the Fed has signaled no change in the near-zero interest rates anytime soon, However, 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 3.2% north to $3.18 over the past month. The stock presently carries a Zacks Rank of 2.  Shares of the company have climbed 45.1% 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

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 top-line improvement. 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 act as 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.  

Shares of the company have rallied 27.6% over the past six months. The Zacks Consensus Estimate for ongoing-year earnings has moved 6% north to $3.02 for 2021 in 60 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 anticipated to stoke revenue growth. Also, steady capital-deployment activities remain a positive factor.

Though falling volatile institutional assets under management 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, coupled with geographical expansion efforts, are tailwinds.

Shares of this Zacks Rank #2 stock have surged 60.3% in six months’ time. The Zacks Consensus Estimate for this year’s earnings has moved 8.3% north to $11.55 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, with no 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 appreciated 32.8% in the past six months. The Zacks Consensus Estimate for 2021 earnings has been revised 9.2% upward to $3.45 over the past 30 days.

Price and Consensus: MC

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