Investors cheered traditional brokerage stocks to all-time highs recently, but some analysts say the party is over.

Though major brokerage stocks rallied last week, they still were down from their six-month highs, as enthusiasm over robust first-quarter earnings started to fade.

Shares of Donaldson, Lufkin & Jenrette Inc. were off 18.7% by last Thursday from the six-month high they reached in mid-April; Lehman Brothers Inc. had fallen 10.7%; Merrill Lynch & Co. 9.1%; and Morgan Stanley Dean Witter & Co. 9%.

Brokerage stocks have rebounded smartly since last fall. However, "there seems to be no great news on the horizon that could cause optimism and thus cause prices to move higher" in the near term, said Michael A. Flanagan, a brokerage analyst at Financial Service Analytics Inc. in Philadelphia.

Investors have been selling traditional brokerage stocks and moving their money into Internet brokerage stocks. But analysts said that's not the only problem for mainstream firms.

Their trading volume continues to be healthy, but underwriting of bond and merger deals has not rebounded to the robust levels of last year.

"It's going to be difficult for them to replicate their strong first quarter," said Harold Schroeder, an analyst at Keefe, Bruyette & Woods Inc.

Mr. Flanagan agreed. "Brokerages reached peak valuations last year when the industry was on the upswing and prices were bolstered by a more speculative environment," he said. "But today we don't see such clear momentum in brokerage fundamentals. And speculation is not running as high as it was last summer."

Analysts are also concerned that brokerages stocks have become "fully valued," meaning there is no reason for investors to increase their positions in the sector anytime soon.

Historically, these stocks have traded at a discount to bank shares because of their volatile earnings stream, but today they trade at a premium to banks. That suggests to analysts that brokerages are still near their cyclical peak and likely to fall relative to banks.

According to Mr. Schroeder, brokerages trade at multiples of 15 to 16 times 1999 annualized current-quarter earnings. If the price ratios are calculated without annualizing the first quarter, they would be 18 or 19 times 1999 earnings, "which is on the high end considering their volatile earnings," the analyst noted.

Large-bank stocks are trading at a multiple of 16 times projected 1999 earnings, said Mr. Schroeder, who has "hold" recommendations on all the brokerages that he covers except for Lehman Brothers.

Traditional brokerages, particularly Morgan Stanley and Merrill Lynch, have tremendous growth opportunities on the global playing field, Mr. Schroeder observed, but that will come at a price.

For example, Merrill's first nine months in Japan have cost the company more than $200 million, the analyst said. Merrill had said the Japan unit would become profitable in 2001; that prediction has since been revised to profitability in 2002.

"The revenues have not materialized on plan, and the expenses are higher than expected," Mr. Schroeder said. "The bottom line is, Japan is going to be a tough market to crack, given the cultural and regulatory barriers that are in place."

"The growth prospects for these firms is strong," Mr. Schroeder said. "But it won't be without some rough road ahead."

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