Invest in Investor Services With These 7 Trading Plays

Brokerage firms, asset managers and financial trading platforms are highly susceptible to market sentiment -- and earnings in the sector could decline as trading activity lessens in a poor market environment. Nevertheless, several leading advisors and contributors to MoneyShow.com see opportunity for long-term investors seeking exposure to the out-of-favor investor services sector. Adam Johnson, Bullseye Brief I'm eyeing one of the most respected pure-play advisory investment banks, which is down nearly 50%, and trading at a considerable discount to historical valuation. When markets finally turn, this could be one of the early advancers. Founded in 1995 by former Deputy Treasury Secretary Roger Altman, Evercore, Inc. ranks #1 at advising U.S. corporations targeted in M&A transactions -- a distinction it has held every year since 2017. Earnings rose to a record last year as corporate activity soared post-Covid, propelling the stock to an all-time high. This year, frozen capital markets are taking a toll on both revenues and valuation, but therein lies the opportunity. While Evercore bankers generate 30% more profit than they did before Covid, their stock trades at its 2019 price, meaning the market gives them no credit. Evercore consistently outranks other boutique investment banking peers on important metrics like return on assets (25% vs. 14%), return on equity (57% vs. 50%), pretax profit margins (34% vs. 24%) and five-year average revenue growth (18% vs. 13%). The decision to buy EVR boils down to valuation, and at around 8 times 2023 earnings estimates it's cheap. The consensus pegs 2023 EPS at $11.50, up 12% from this year but still down significantly from last year's all-time high of $17.50. I like owning EVR at or below $90, which is consistent with support in recent months. This area also coincides with a longer-term trend line. My target of $165 derives from applying a 10-year average P/E multiple to earnings that reflect 25% growth for 2023. Mike Cintolo, Cabot Top Ten Trader With the broader U.S. equity market in bear market territory, interest in stock trading isn't exactly booming right now -- a fact underscored by the latest monthly report from Interactive Brokers Group . The firm reported daily average revenue trades in August that were down 9% from a year ago, with client equity down 15%. However, those numbers obscure the stunning growth in client accounts, which rose 33% last month to nearly two million. Interactive, which offers access to stocks, bonds and funds through its electronic trading platform (the largest in the U.S. based on average revenue trades per client), is tilted toward institutional customers. Client growth among this class of traders is partly driven by the access the firm offers clients to alternative assets like cryptocurrencies and hedge fund investing. Although the company reported an earnings miss in Q2 (EPS of 84 cents missed by eight cents), sales and earnings were relatively flat while commission revenue increased 5% to $322 million on higher customer options and futures trading. The bottom line here is that, despite the bear phase, Interactive should see earnings up this year and accelerate in 2023, which is impressive. Like most of its brokerage peers, IBKR's story during the first several months of this year was one of declines, with the stock falling as low as $52 in May before beginning its bottoming process. You can keep an eye on it, or if you want in, consider a small stake in the mid-$60s. Doug Gerlach, Investor Advisory Service The Charles Schwab Corp. has been at the forefront of major changes in the brokerage industry over the past several decades from offering discounted brokerage commissions in 1975 to the transformational acquisition of TD Ameritrade in October, 2020. Despite financial market weakness this year, Schwab has continued to attract new customer assets within the same 5%-7% organic growth rate that it has exhibited over the past decade in a range of different market environments. Rising interest rates in 2022 have resulted in lower equity and fixed-income prices, hurting Schwab's trading and asset management and advisory revenue, but helping its net interest income which grew 23% in the first half of 2022. This should be a multi-year source of growth as it reinvests proceeds from maturing securities. Earnings should grow faster than revenue over the next few years as Schwab gains efficiencies from the merger and its portfolio yield rises as proceeds from maturing securities are reinvested at higher interest rates. We model 12% annual revenue growth, but 18% EPS growth over the next five years as these favorable tailwinds continue. In five years, EPS could be as high as $6.95. Applying a high P/E ratio of 24.9 could result in a stock price as high as $173. Adding in a modest 1.2% dividend yield, the total return could exceed 20% annually. We estimate the downside risk as 36% to $45, the multiple of its low P/E of 14.9 and last twelve months' EPS of $3.04. Tim Melvin, Tim Plaehn's The Dividend Hunter Insiders I am an enormous fan of insider buying; when insiders buy more shares of the company they run, they are making an emphatic statement that they expect good things to happen in the future. B. Riley Financial is a very attractive option that both has a high yield and has recently been bought by insiders. For my money, they are the very best small-cap research brokerage firm in the United States today. B. Riley also has a wealth management division that manages assets for high-net-worth institutions, including endowments and pension funds, as well as an advisory business that consults with companies on merger and acquisition opportunities. All of its wide range of corporate services are fantastic businesses on a stand-alone basis, but as part of the B. Riley team, each expands the company's core knowledge base of all things corporate and financial. The knowledge gained by each division makes the other divisions of the company better at what they do. B. Riley Financial itself has been buying tens of millions of shares of stock on the open market, as have several key executives. For example, both the co-CEOs, Bryant Riley and Thomas Kelleher, have been buying large amounts of stock in the company they oversee. Andrew Moore, the head of B. Riley Securities, also recently purchased almost half a million dollars worth of shares. Several directors have also been buying the stock lately. The company is generous about sharing that cash with shareholders. As a result, the stock currently has a dividend yield of more than 7%. This is a fantastic business that has an enormous amount of recent insider buying a very generous yield. Historically that is a combination that usually works out very well for shareholders. Ben Reynolds, Sure Passive Income Cboe Global Markets Inc. is an options, forex, and equities exchange that operates globally; the company was founded in 1973, produces about $3.6 billion in annual revenue, and trades with a market cap of just over $13 billion. CBOE reported second-quarter earnings in July and results were largely in line with expectations. Total revenue was a new record at $424 million, up 21% year over year. Earnings per share rose from $1.38 to $1.67 year over year. The company updated guidance for this year to 9% to 11% total revenue growth, up sharply from the prior range of 5% to 7%. We now expect $6.25 in EPS for this year, which would represent a new record. CBOE has a respectable streak of dividend growth, growing its dividend by an average compound rate of over 13% for the last decade. Still, its payout ratio is just 32% of this year's expected earnings. That's because the company was able to grow earnings at high rates during this period as well, which is something we expect to continue for the foreseeable future. CBOE could experience a sizable decline in earnings and still raise its dividend, so from a safety perspective, we rate it highly. We note that trading volumes may decline during prolonged bear markets, which increases the company's recession vulnerability. Still, we currently have no concerns about the company's dividend safety. The stock is trading for about 19 times this year's earnings, which is below our estimate of fair value at 25 times earnings. That implies we could see a ~5% tailwind to total returns annually from the valuation. In concert with the 1.7% dividend yield and 6% earnings growth, we forecast better than 12% total annual returns in the coming years. With the valuation, strong growth prospects, and the company's history as a first-rate dividend growth stock, we are optimistic about this stock. Bruce Kaser, Cabot Undervalued Stocks Advisor Based in Boston, State Street Corporation is the world's largest custodian bank, with $38 trillion in assets under custody/administration. In its early days, State Street provided back-office services for investment managers. Over time, the bank added middle-office and front-office services, including client reporting, electronic trading and full enterprise solutions for investment managers. Today, all of these services comprise about 56% of the bank's revenues. The bank's State Street Global Advisors subsidiary is a major issuer of index exchange-traded funds (ETFs), with $3.5 trillion in assets under management. SSGA produces about 17% of total revenues. Shares of this well-managed, high-quality name are out of favor with investors. Long-term concerns include slow industry revenue growth along with steady pricing pressure from competitors. While we acknowledge these issues, we see State Street as a solid, well-capitalized franchise that provides critical services, with a slow growth but steady revenue and earnings stream. Our interest in the shares is that we can buy them at an attractive 8.6x estimated 2023 earnings. This is below what we believe is a fair valuation at about 11x. The valuation on tangible book value (TBV), at about 1.9x, is also at the low end of its post-financial crisis valuation range. We also find the dividend yield appealing. The shares have significant upside to our $94 target. The 3.7% dividend is well supported and backed by management's strong commitment. Marty Fridson, Forbes/Fridson Income Securities Investor AllianceBernstein Holding LP is a global asset management firm that provides investment and research services worldwide to institutional, high net worth, and retail investors. AB's assets under management (AUM) were approximately $689 billion as of 07/30/22. The firm reported Q2 2022 adjusted operating income of $225.8 million, down 19.1% from a year earlier, but matching analysts' estimates. During the second quarter operating income felt the impact of mounting geopolitical risks, as well as increased global macroeconomic concerns tied to heightened recessionary fears and higher interest rates. Net outflows of $2.7 billion were moderate, as taxable fixed income outflows were partially offset by continued organic growth in municipals and alternative assets. Adjusted net revenues of $816.3 million were down 7.4% from a year earlier. Margin compression was evident in the face of market volatility and reduced client activity, leading to a 400-basis-point contraction in AB's adjusted operating margin to 27.7%. We expect the partnership to rebound and deliver improved operating results over the second half of 2022. We continue to recommend AB for low- to medium-risk taxable portfolios. Distribution growth has been solid, while the outlook remains constructive. Distributions are taxed on a variable basis, with AB issuing a K-1 to its investors. We are raising the fair-value price on this investment security to $60.00 from $39.00, for a 4.73% annualized yield.

Invest in Investor Services With These 7 Trading Plays

This could be an attractive opportunity for long-term investors seeking exposure to a currently out-of-favor sector.

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