Wall Street analysts have grown cautious on Wall Street stocks, with many concluding that brokerages are due to cool off after a blistering start to 1996.
Brokerages have scored worse than other sectors in the First Call Analyst Consensus Rankings since the weekly survey was introduced in American Banker two weeks ago. (See page 30.)
Charles Schwab & Co., the discount brokerage, has been the least favored stock among the 170 in the rankings, closely followed by the St. Louis- based brokerage A.G. Edwards & Co.
PaineWebber Inc. and Alex. Brown & Sons also were among the 10 least favored stocks.
First Call ranks companies from 1 to 5, based on analysts' buy, hold, and sell ratings. A 1 rating represents strong buy recommendations, while a 5 rating would indicate strong negative sentiment.
The brokerages' ratings last week ranged from 2.1 to 3.6 - a lower range than any other sector in the American Banker universe. Thrift stocks, for example, ranged from 1.0 to 3.0, while large banks' stocks fell in the 1.8 to 3.2 range.
Although some noted that a downturn in the highly cyclical brokerage business probably is inevitable, that wasn't the primary motivation behind the low ratings.
"It all appears to be valuation in the minds of those analysts," said Chuck Hill, director of research at First Call Corp. Mr. Hill said brokerage was "one of the better performing sectors" last year and early this year, and that it is not surprising that analysts believe the stocks have risen as high as can be expected.
Analysts' comments on Schwab - whose business strategy is widely admired - underscored the valuation theme.
Salomon Brothers analyst Thomas Facciola said the trading value of the stock, at about 23 times his 1996 earning per share estimate, was well above the 15 to 17-times earnings multiple he would be comfortable with. But the analyst, who has a hold rating on the stock, characterized Schwab as a market leader with double-digit growth potential that has taken steps to expand its business lines and reduce its volatility.
"I had a buy on the stock until recently, but I downgraded it," added Guy Moszkowski, of Sanford C. Bernstein & Co. "It got to about 21 times my earnings forecast, and at that price it's discounting a very high level of growth."
Mr. Moszkowski said other brokerages have less growth potential and trade in a lower range than Schwab. But he said the other companies enjoyed similar run-ups in share price early last year and early this year, fueled by an active stock and mutual fund market.
"If the market continues to be strong, these companies will beat expectations," Mr. Moszkowski said. "But they are much closer to fair value than they were a month or two ago."