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Investment Banking Industry Looking Up: 3 Stocks to Buy Now

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Like other industries, investment banking (IB) space wasn’t untouched by the coronavirus outbreak and ensuing mayhem. As the economy and business activities came to a grinding halt, deal making activities stopped all together. Yet, the other aspect of IB business — trading activities — continued unabated. This, in turn, supported investment banks’ financials to a great extent.

Now that the scenario is gradually improving, investment banks are in focus again. Global M&As were back with a bang in the third quarter of 2020 as economic and business activities gradually resumed. Dealmakers revisited transactions that were on hold, with the trend expected to continue well into 2021.

Likewise, IPO activities rebounded, with the third quarter being one of the busiest since 2000. The green shoots of recovery were already visible in the last couple of weeks of the second quarter, with trend witnessing a significant upswing during the third and fourth quarters. The pipeline for IPOs remains strong, with healthcare, technology and blank-check companies in focus.

Additionally, there was a significant increase in client activities and volatility, which led to a rise in trading income (both equity and fixed). The momentum is expected to persist as volatility in the markets will continue, thereby leading to rise in client activity.

Thus, investment banks, which provide underwriting and advisory services for IPOs and secondary market offerings along with M&As, are definitely going to benefit from these favorable trends heading in 2021.

Moreover, the Zacks Investment Bank industry currently carries a Zacks Industry Rank #21, which places it in the top 8% 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. Since the end of May 2020, the industry’s earnings estimates for 2020 have moved north by 43.8%.

Therefore, this a right time to add a few fundamentally strong investment banks to your portfolio to earn solid returns.

3 Investment Banks to Bet on

Goldman Sachs (GS - Free Report) is a major globally diversified investment bank. The key source of the company’s earnings stability is its business diversification. Over the past three to five years, this Zacks Rank #1 (Strong Buy) company witnessed earnings growth of 8.1%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

The company’s investment banking revenues witnessed a three-year (2017-2019) CAGR of 1%, with the uptrend continuing in the first three quarters of 2020 on a solid underwriting business. Also, Goldman’s solid position in globally announced and completed M&As provide leverage over its peers.

Goldman is undertaking several initiatives to improve revenue mix. With this aim, it boosted the GS Bank’s business with the acquisition of online deposit platform of GE Capital Bank in April 2016. Further, it launched a digital consumer lending platform — Marcus by Goldman Sachs. The company is likely to benefit from its exposure to the fast growing exchange-traded funds market too.

Moreover, Goldman has an impressive dividend yield. Based on last day’s closing price of $238.84, the company’s dividend yield currently stands at 2.09%.

The company has been witnessing upward earnings estimate revisions lately, reflecting analysts’ optimism regarding its earnings growth potential. The Zacks Consensus Estimate for 2020 earnings has been revised 34.3% upward over the past 60 days, while that for the next year has been raised 5.4%.

Evercore Inc. (EVR - Free Report) is a leading independent investment banking advisory firm. Founded in 1995, the company operates from its offices and affiliates in North America, Europe, the Middle East and Asia.

Evercore generates majority of its revenues from Investment Banking segment. The segment witnessed a five-year (ended 2019) CAGR of 14.2%, despite recording lower revenues in 2019. Notably, segment’s revenues were relatively stable in the first nine months of 2020.

Moreover, over the past three to five years, the company witnessed earnings growth of 21.7%. Further, analysts are bullish on this Zacks Rank #1 stock. Over the past 60 days, the Zacks Consensus Estimate for current-year earnings has moved 62.2% north, while that for 2021 has risen 22.3%.

Additionally, Evercore remains committed to enhancing shareholder value as seen from its involvement in steady capital deployment activities. In October, it hiked its dividend by 5%. Based on last day’s closing price of $98.23, the company’s dividend yield currently stands at 2.48%.

The company also has a share buyback program in place. As of Sep 30, 2020, nearly 3.3 million shares remained to be repurchased under the authorization, which has no expiration date. Evercore’s consistent earnings record, along with solid liquidity position, indicates that these capital deployment activities are sustainable.

Moelis & Company (MC - Free Report) is a global investment bank, providing strategic and financial advisory services that include M&As, capital markets transactions, recapitalizations and restructurings, and other corporate finance matters. The company has offices 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 revenues recorded a CAGR of 7.8% over the last five years (2015-2019). The rise was largely driven by its geographical expansion efforts and an increase in average fees earned per completed transaction.

The company’s alliances in Japan and Mexico as well as non-controlling stake equity in Moelis Australia Limited offer support. Notably, since its inception in 2007, this Zacks Rank #2 (Buy) company has advised on more than $2 trillion worth of transactions.

Further, Moelis & Company has impressive capital deployments. Since 2014, it announced eight dividend hikes, with the last one in October. Nevertheless, in April, the company had temporarily cut dividend by 50% amid coronavirus-related uncertainty. Also, the company pays special dividend on a regular basis. In fact, Moelis & Company has been paying special dividends even before it started paying quarterly dividend from October 2014.

Further, Moelis & Company has a share repurchase plan in place. As of Sep 30, 2020, the company had $80.9 million left under share buyback plan, which was announced in February 2019. As the company’s debt balance is immaterial and balance sheet position remains strong, its enhanced capital deployment actions look sustainable and will continue to enhance shareholder value.

The company has been witnessing upward earnings estimate revisions, reflecting analysts’ optimism regarding its earnings growth potential. The Zacks Consensus Estimate for 2020 earnings has been revised substantially upward over the past 60 days, while that for the next year has been revised 21.2% upward.


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