Investing in Asset Managers: 8 Brokerage Buys

As a rule, rising markets over time lead to increased assets under management which, in turn, lead to higher revenues and earnings for companies that help manage these pools of funds. From smaller boutique research firms to some of Wall Street's largest bankers, several MoneyShow.com contributors highlight their favorite investments among investment bankers and brokerage firms. Mark Skousen, Five Star Trader One of the fastest-growing brokerage firms has shown up on our radar screen; Raymond James recently moved up after handily beating Street estimates for the fourth time in a row. Based in St. Petersburg, Florida, Raymond James is a global financial services company that is competing with the leaders in the sector. In addition to offering brokerage services, it provides portfolio management to private clients, investment banking, private equity and commercial real estate. It's also famous for its annual stock portfolio beating the market. Business is booming. Last year, client assets under administration rose by 23% to $1.26 trillion, and financial assets under management climbed by 20% to $203.2 billion. Profit margins are rising to 15%. Net profits jumped by 43% to $1.5 billion in 2021 on revenues of $10.4 billion. It has had a rising dividend policy since 1986, and it just raised its dividend last month from $0.26 a share to $0.38. Raymond James has $20 billion in cash, which is plenty to acquire additional assets, and only $3.8 billion in long-term debt. Wall Street analysts project that RJF stock could hit $133 a share this year and given that it recently was selling for less than 14 times forward earnings, there's plenty of upside potential. Ben Reynolds, Sure Dividend T. Rowe Price Group , founded in 1937 and headquartered in Baltimore, MD, is one of the largest publicly traded asset managers. The company provides a broad array of mutual funds and separate account management for individual and institutional investors, retirement plans and financial intermediaries. In December, T. Rowe Price completed the acquisition of Oak Hill Advisors. T. Rowe Price's earnings, as well as its dividends, have grown substantially over the last decade. While earnings did drop during the last financial crisis, the overall record has been quite good. Since 2007 the company has grown earnings per share by an average compound rate of 12.7% per annum. Moreover, the company performed well in 2020. Asset managers like T. Rowe have low variable costs. As a result, higher revenues, driven primarily by increasing assets under management, allow for margin expansion and attractive earnings growth rates. T. Rowe Price's strong past performance is a key selling point and could attract customers going forward. In addition, the firm has another growth lever in the way of share repurchases. T. Rowe Price has been a great business, with strong operating metrics for many years. Total return potential comes in at 10.6% per annum, stemming from 3% growth, a 2.9% starting dividend yield and the potential for a valuation tailwind. Shares earn a buy rating. Richard Moroney, Upside Stocks A leading provider of investment-banking and money-management services, Evercore is benefiting from robust merger and acquisition (M&A) activity. In the December quarter, Evercore generated per-share earnings of $7.15, up 26% and handily above the consensus of $4.56. Evercore's revenue advanced 16% to $1.1 billion, exceeding the consensus of $970 million. Adjusted operating margin surged more than five percentage points to 38.8%. During the quarter, advisory fees jumped 23%, and asset management fees increased 21%. The stock sports a Quadrix Overall score of 97; this means that the stock scores better than about 97% of the nearly 5,000 companies in our Quadrix ranking system. The stock earns a quality rank of 99 for its long-term growth record and returns on assets, equity, and investment. Overall, Evercore is rated Buy. Mike Cintolo, Cabot Top Ten Trader Charles Schwab needs no introduction; its recent acquisition of TD Ameritrade has made it the nation's largest brokerage firm as measured by total client assets. Schwab's financial performance is the reason for its recent strength, and the likelihood of higher interest rates is expected to give the bottom line a boost going forward, too. In Q4, revenue leapt 13% from a year ago to $4.8 billion, while per-share earnings of 86 cents rose 16%. Assets under management increased a solid 22% from a year ago (and 7% from Q3) to a record of just over $8 trillion across 33 million brokerage accounts as the firm continues to attract new clients, helped in part by the Ameritrade acquisition. Looking ahead, management said rising interest rates would help the firm navigate volatile market conditions and generate meaningful revenues in 2022. Wall Street sees top- and bottom-line growth in the low single digits for Q1 but rising 11% and 35%, respectively, in Q2, with earnings expected to grow north of 20% both this year and next. The latest 11% dividend increase (0.9% yield) is an added bonus. Elevated asset prices have been a boon for asset managers, especially for firms with broad digital exposure and online wealth management platforms. Stifel Financial provides full-service securities brokerage, investment banking, trading, investment advisory and related services to individual and institutional clients. The company partly attributes a sterling 2021 performance (its fifth consecutive year of record earnings per share) to what it calls a super-charged digital transformation. Stifel's Q4 report featured consensus-beating revenue of $1.3 billion that increased 22% from the year-ago quarter, while full-year sales of $4.7% rose 26%. Per-share earnings of $2.23, meanwhile, beat estimates by 34 cents. Stifel approved a 100% increase in the quarterly dividend starting in the first quarter (1.5% yield) with plans to push shareholder returns via both dividends and buybacks. Going forward, management sees its net interest income increasing by at least $150 million in 2022, and possibly as much as $250 million (assuming the Fed hikes rates three times this year), which management said would be a significant driver of the bottom line in 2022. The company also forecasts net revenue for this year between $4.9 and $5.2 billion, up 10% at the midpoint, which would be the 27th straight year of a rising top line. It's a solid financial and bull market stock story. Bob Ciura, Top 10 Dividend Elite SEI Investments is an asset management holding company. It provides wealth management, retirement and investment solutions, asset management and administration, and investment advisory services. The company has a long list of clients from private banks to independent financial advisors to corporations. SEI sports a very impressive 31-year dividend increase streak. We think SEI can produce 6% annual earnings-per-share growth in the coming years, driven by a combination of revenue gains and share repurchases. Margins have been spotty at times as the firm invests heavily in future growth, but over time, should drift higher. The company recently reported earnings per share of $1.03 for the fourth quarter, which was six cents ahead of expectations. Revenue was up 13% year-over-year to $502 million, with each major segment producing robust growth. Much of SEI's strength was due to double-digit growth in average assets under administration, which expanded $105 billion to $884 billion in Q4. The stock recently traded at 15.3 times this year's earnings estimate, which is modestly under our estimate of fair value at 18 times earnings. That could drive a 3.2% tailwind to total returns, and when combined with a 1.4% dividend yield and 6% earnings growth, we see potential for 10.5% annual returns. John Buckingham, The Prudent Speculator Perhaps it was the analysts that missed this go around. Per-share profits for Goldman Sachs were some 7% below the Street consensus figure, which was attributed to higher wages. But given the flurry of investment banking activity last year from a significant increase in completed mergers and acquisitions volumes, one might have expected an above-average bonus season was around the corner. Indeed, the Wall Street powerhouse produced $14.9 billion of banking fees in 2021, 58% higher than the 2020 figure (which was 22% higher than 2019). The market rebound from the pandemic lows also supported strong asset management revenue as Goldman produced a 24% return on tangible equity. Book value per share now stands at $284.39 as of quarter end, a cumulative 30% improvement over the past two years. Shares were under pressure recently, falling amid the earnings-induced market dip. All said, we continue to find the stock attractively valued, recently trading at less than 9 times a very achievable Street EPS projection of more than $40.00 for 2022. We continue to like the healthy balance sheet and ongoing sound strategic repositioning. The build-out of its traditional banking and investment management businesses should serve shareholders well in the long run, as almost two-thirds of Goldman's revenue still comes from its investment banking and global markets trading business segments. We continue to like that the ultimate goal of Goldman's evolution is to change the trading and deal making titan into a more well-rounded financial firm with more stable consumer and commercial businesses. The dividend yield is 2.3% and our Target Price remains $477. Shares of Morgan Stanley managed to tread water during an otherwise awful week for financial stocks thanks to the posting of better-than expected EPS of $2.08 for Q4, bringing the full-year figure to $8.22 (a 25% improvement year-over-year). With variability between segments from quarter to quarter, 2021 was a record year for the 86-year-old Wall Street titan and would have been even without contributions from recently acquired Eaton Vance & E-Trade. Strong market performance and asset flows pushed Wealth Management assets to $1 trillion in the past year, bringing total client assets to $6.5 trillion including investment management. Investment banking revenue increased 43% from a year ago, led by higher completed M&A transactions, strong IPO volumes and non-investment grade loan issuance. After posting a 27% pre-tax margin and 19.8% return on tangible equity in 2021, management upped its goals (from the previous range of 26% to 30%, to more than 30% for the former and from a range of 14% to 16%, to 20% for the latter). MS bought back $2.8 billion of its outstanding common stock during the quarter. Despite strong price gains in the past year, the dividend yield is still an attractive 2.8%. And, while another increase the size of the 50% jump in the payout last April is not in the cards, we would expect a dividend increase around the corner. We continue to like the long-term prospects of MS as the near-decade-long transformation toward advisor-led relationships has improved the stability of its business model. We continue to see MS benefiting from strong capital market activities and room for expanding operating leverage in wealth management. Our Target Price has been lifted to $120.

Investing in Asset Managers: 8 Brokerage Buys

Experts highlight their favorite investments among investment bankers and brokerage firms.

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