The stock market may be flirting with new all-time highs, but you wouldn't know by talking to most investment bankers right now. Merger and acquisition activity declined by about 20% compared to 2015 in the first quarter and the IPO market is very quiet. The boom times for bankers came to a sudden halt in the last half of 2015 and the share prices of some of the smaller investment banking stocks have fallen to what now appear to be bargain levels.
It hasn't helped that many of them also have asset management and institutional brokerage businesses and these have not been very robust businesses in the last six months or so, either. They are currently out of favor, but the long-term rebound potential is substantial and long-term oriented aggressive investors should be looking for rebound candidates in the industry.
FBR & Company (FBRC) has to be at the top of the list, as things could change here sooner rather than later if an activist investor has anything to say about it. San Francisco-based Voce Capital owns 5.3% of the investment bank and recently released a presentation titled "FBR and Company -- Rekindling the Spirit of Success." They point out in the presentation that the market is valuing the company below book value, even though almost 85% of the book value of FBR is cash and securities. There is little or no value being assigned to the operating business. Voce Capital calls the firm a Tiffany franchise that has lost its way.
The activist firm has harsh criticism for the current management of FBR. The stock of the investment bank is lower today than it was when current management took over, in spite of the meteoric rise in the overall market during the same time. They also note that since CEO Rick Hendricks took over the top spot in January 2009, he has received more than $21 million in compensation, while shareholders have lost money. The top three executives average $7 million annually and consume 7% of the total compensation at the firm. Non-compensation expenses are also very high, twice the average of its industry peers.
Voce suggests that FBR needs to get back to basics and focus on its former core business serving the finance, real estate and energy industries. Of course, broad cost-cutting measures are also suggested, to help increase the return on equity and hopefully boost the stock price. The activist firm has nominated three candidates to the board of directors, with hopes of passing and implementing the suggested changes. If they are successful, the gains in the stock could be significant. If the shares just trade back up to the book value, they would post a gain of almost 60%. The long-term potential is even greater if a refocused FBR & Company was able to begin growing book value once again.
The other investment banking and asset management firm worth a look at current prices is Cowen Group (COWN). Shares of the firm have bounced from the depth of the lows hit back in February, but they still trade for less than 60% of book value. The firm reports earnings on Thursday and it is probably not going to be a great quarter. Should it miss the already drastically reduced estimates for the quarter, we could see some selling that allows us to buy the stock at fire sale prices again.
CEO Peter Cohen has been using the current disruption in the industry to expand his firm. Last month, Cowen announced they were buying the credit products, credit research, special situations and emerging markets units of CRT. The units will be rebranded as Cowen Credit Research and Trading, and will include the sales and trading of distressed convertibles, high yield securities, distressed debt, private placements and trade claims.
The distressed business in particular could be a timely addition, given the weakness in high yield, especially energy-related credits, which is developing right now. Cowen President Jeffrey M. Solomon told investors that the purchase gives the firm a chance to line up in front of what should be a huge opportunity. I think he is right and the deal adds real value to the firm.
The current weakness in investment banks appears to present an opportunity to buy these firms at a discount to their real value. Patient investors should be well rewarded over time.