Investment banks and brokerages have become the stock of choice for investors looking for some footing in financials, a trend that was evident yet again Monday, when stock prices of most brokerages rose while those of most banks fell.
"The banks are the ugly duckling of Wall Street," said David Allaire, co-advisor for the Imperial Bank Fund, a portfolio of financial stocks managed by Retirement Planning Co. of Providence, R.I. "Investment banking are being treated well by the market right now."
With a rising stock market, investors believe investment houses - with their underwriting, capital markets, and brokerage business lines - will reap bigger gains than most commercial banks. Investment houses also have been able to better exploit some of the market's craze over technology stocks, with Goldman Sachs Group Inc. and Morgan Stanley Dean Witter & Co. tapping into the initial public offerings.
As a result, portfolio managers required to carry some financial weighting in financial stocks are turning to the brokerages because they are perceived to have better earnings potential. "If you need representation in financial services and you are looking for the one group to outperform, it is brokerages," said E. Reilly Tierney, an analyst with Fox-Pitt, Kelton. "Portfolio managers are happy to put market risk of their portfolio in the investment banks. The alternative is to continue to underperform."
Mr. Allaire said he plans to tinker with the guidelines of his financial fund to allow the fund to invest in more investment banks. Mr. Allaire said the fund owns stock in Morgan Stanley, Merrill Lynch & Co., and E-Trade Group Inc. but is prevented from buying more.
Earnings multiples at the brokerages on average well outpace banks' multiples. For example, Morgan Stanley has a p/e of about 19.1 times estimated 2000 earnings; Goldman Sachs, 19.6; and Merrill Lynch, 17.
Though banks have expanded into investment banking, their market share lags the Wall Street firms', and they trail the investment banks in stock multiples. First Union Corp. has a p/e of 8.5; FleetBoston Financial Corp., 8.4; and Chase Manhattan Corp., 13.5.