Diane Glossman, a equity analyst with UBS Warburg, is betting that some of the biggest names in investment banking are well positioned to survive the famine that has hit deal calendars on Wall Street thanks to market volatility.
On Thursday, Ms. Glossman initiated coverage for Goldman Sachs Group, Lehman Brothers, Merrill Lynch & Co., and Morgan Stanley Dean Witter & Co. She gave each company a buy rating. In a research note, Ms. Glossman wrote that the slowdown in new deals in most sectors and looming concerns over the global economic environment, particularly in the United States and Japan, will contribute to lower revenue expectations for the first half.
However, she sounded a note of optimism. We think that this is already reflected in the current valuations, for the four companies, which are at the low end to middle of historical ranges, she wrote. The franchises themselves are probably in their best shape yet.
Investment banking firms were the largest gainers in the financial sector Thursday, as the broader market made a remarkable recovery from the battering it sustained during recent sessions.
Goldman Sachs stock rose 10.92% to close at $86. Lehman Brothers climbed 12.77% to $62.42, Merrill Lynch 8.39% to $56.06, and Morgan Stanley 15.78% to $52.40.
The American Banker index of the top 225 banks rose 5.54%, and the index of the top 50 banks 3.86%.
The Dow Jones industrial average jumped 4.23% in the second-biggest points gain in its history. The Nasdaq composite soared 8.93%, the third-largest percentage gain in its history, as investors finally received some good news from the technology sector. Dell Computer Corp. announced that it would meet first-quarter earnings estimates.
Adam Lewis, a senior vice president on the equity trading desk at Keefe, Bruyette & Woods Inc., said it seems like the financials are being taken along for the ride.
Investment banking firms, seem to be snapping back from major, major oversold positions, Mr. Lewis said.
However, layoffs on Wall Street persists.
Merrill Lynch has recently announced layoffs in its public finance division. Goldman Sachs has said that it is trying to reduce expenses, and that is has dismissed workers as part of an annual review process.
I think all of these companies will be announcing layoffs, Ms. Glossman said in an interview. In fact, I would consider it a negative if they didnt.
Elsewhere in the financial sector, CIBC World Markets initiated coverage Thursday for four banking companies in Texas.
Thomas D. McCandless, an equities analyst at CIBC World Markets, rated Summit Bancshares of Fort Worth and Prosperity Bancshares, a commercial banking company in Houston, as strong buys, and Sterling Bancshares, another Houston commercial banking company, as a buy.
He also initiated coverage of Southwest Bancorp, a third Houston commercial banking company, with a hold rating.
The Texas economy is showing no signs of a slowdown, Mr. McCandless said in an interview. This, combined with the fact that there is a dramatic shift in market share going on, led him to initiate coverage of the four companies, he said.
Big banking companies nationwide are boosting the account minimum for commercial borrowers, and some of the smaller companies benefiting tremendously from this, Mr. McCandless said.