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Near-Term Outlook Looks Bright for Investment Bank Industry

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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 institutions began as partnership firms focused on initial public offerings (IPOs), and secondary market offerings, brokerage, and mergers and acquisitions. These firms have 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 U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulations.

The passage of the Dodd-Frank Act of 2010, post the 2008 financial crisis, put restrictions on certain investment banking activities, such as proprietary trading. However, considering the need for better business flexibilities in the current economic scenario, these restrictions are being eased.

Some of the prominent stocks in this industry are Goldman Sachs (GS - Free Report) , Morgan Stanley (MS - 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. Several lingering concerns, including uncertainties related to the U.S.-China trade war and Brexit, the Federal Reserve’s accommodative-monetary policy stance and expectations of global economic slowdown persisted, weighing on investors’ minds, resulting in lower client activities. However, strong equity markets provided some respite all through this year. Therefore, an expected upswing in activities, improving domestic economy 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, might keep rising on the back of steady economic growth and increasing corporate earnings. Although trade-war worries, though subsided to an extent recently, and expected pause on interest rates by the Fed can curb growth, the M&A deal volume is anticipated to increase. Moreover, steady IPO activities, backed by sturdy equity markets and decent corporate earnings, will work in favor 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, in order to support clients with the development of infrastructure and new platforms.

Zacks Industry Rank Indicates Solid Prospects

The group’s Zacks Industry Rankk, 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 #99, which places it in the top 39% 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 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 this September 2019, the industry’s earnings estimates for the current year have moved north slightly.

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 45-stock group within the broader Zacks Finance Sector, has outperformed its own sector but lagged the S&P 500 over the past year.

While the stocks in this industry have collectively gained around 20%, the Zacks S&P 500 composite has gained 28.4% and the Zacks Finance sector has rallied 19.6%.

One-Year Price Performance


Industry’s 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 the most appropriate multiple for valuing finance companies 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 2.39X, below the median level of 2.40X, over the past five years. This compares with the highest level of 3.33X and lowest level of 1.60X 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 12.28X and the median level is 9.05X.

Price-to-Tangible Book Ratio (TTM)

The Zacks Finance sector’s trailing 12-month P/TBV ratio of 3.27X and the median level of 3.46X for the same period are above the Zacks Investment Bank industry’s respective ratios.

Price-to-Tangible Book Ratio (TTM)

Bottom Line

Market-volatility driven growth anticipated in trading business might not continue for long, as volatility is likely to wane once global economy issues stabilize. Also, expenses on technology and business diversification might impede top-line growth in the upcoming period. Nonetheless, investment banking business is likely to prosper on increased IPO and M&A activities.

One should particularly consider betting on investment bank and broker stocks that display upbeat earnings outlook. We are presenting three stocks carrying a Zacks Rank #2 (Buy).

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here)

E*TRADE Financial Corporation : This New York, NY-based bank has rallied 5.6% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised slightly upward, in the last 60 days.

Price and Consensus: ETFC

Piper Jaffray Companies : Shares of this Minneapolis, MN-based bank has appreciated 21%, in the past year. The Zacks Consensus Estimate for 2019 EPS has been revised slightly upward in the last 60 days.

Price and Consensus: PJC

TD Ameritrade Holding Corporation (AMTD - Free Report) : The stock of this Omaha, NE-based bank has gained 3.7% in a year’s time. The Zacks Consensus Estimate for fiscal 2020 EPS moved marginally north over the last 60 days.

Price and Consensus: AMTD

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