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, imposed 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) , ETRADE Financial (ETFC - 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 a volatile market performance leading to a surge in client activities, significantly toward the tail end of the first quarter. As the Federal Reserve’s accommodative-monetary policy stance and global economic slowdown worry investors, we might see lower client activities in the coming quarters. Also, lesser support is expected from the equity markets. Therefore, an expected decline in activities, economic slowdown and a resilient investor sentiment on the coronavirus scare might fail to 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 viral outbreak. Also, 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. Moreover, subdued IPO activities on volatile equity markets are likely to be unfavorable 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, in order to support clients with the development of infrastructure and new platforms.
Zacks Industry Rank Indicates Gloomy Prospects
The group’s Zacks Industry Rank, which is basically average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects.
The Zacks Investment Bank industry currently carries a Zacks Industry Rank #147, which places it in the bottom 42% 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 bottom 50% of the Zacks-ranked industries is a result of the bleak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since May 2019, the industry’s earnings estimates for the current year have slumped 56.2%.
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 21-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 lost 18.7%, the S&P 500 composite has gained 0.6% and the Zacks Finance sector has declined 21.2%.
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 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 0.98X, below the median level of 2.39X, over the past five years. This compares with the highest level of 3.33X and lowest level of 0.86X 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 10.83X and the median level is 9.2X.
Price-to-Tangible Book Ratio (TTM)
The Zacks Finance sector’s trailing 12-month P/TBV ratio of 2.41X and the median level of 3.47X 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 trading business might not continue for long, as volatility is likely to wane once the global economy issues stabilize. Also, expenses on technology and business diversification might impede top-line growth in the upcoming period. Furthermore, investment-banking business is likely to be impacted by decreased IPO and M&A activities.
Nevertheless, one should particularly consider betting on investment bank and broker stocks that display upbeat earnings outlook. We are presenting two stocks sporting a Zacks Rank #1 (Strong Buy) and one stock with Zacks Rank of 2 (Buy).
(You can see the complete list of today’s Zacks #1 Rank stocks here)
GAIN Capital Holdings Inc (GCAP - Free Report) : This Bedminster, NJ-based bank has rallied 34.9% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised significantly upward, in the last 60 days. The stock currently flaunts a Zacks Rank of 1.
Price and Consensus: GCAP
BGC Partners Inc (BGCP - Free Report) : Shares of this New York-based bank has depreciated 46.8%, in the past year. The Zacks Consensus Estimate for 2020 EPS has been revised 4.8% upward in the last 60 days. The stock currently holds a Zacks Rank #2.
Price and Consensus: BGCP
Tradeweb Markets Inc (TW - Free Report) : Shares of this New York-based bank have appreciated 34% in a year’s time. The Zacks Consensus Estimate for the ongoing-year EPS moved 8.5% north over the last 60 days. The stock currently sports a Zacks Rank #1.
Price and Consensus: TW