by Dan Burrows | September 16, 2013 12:52 pm
If retail investors are so sour on stocks, then why are shares in the big retail brokers going gangbusters this year?
Charles Schwab (SCHW) is up 51% so far in 2013. TD Ameritrade (AMTD) has rallied 63%. And E*Trade (ETFC), once thought to be a dead man walking, is up more than 90% for the year-to-date.
True, some retail investors are dipping their toes back into the equity waters. The housing and job markets are improving, which helps bolster confidence. And, more importantly, despite a tough August, stocks remain close to all-time highs.
Still, retail interest is nowhere close to what it used to be. Volume on the major exchanges is languishing at levels not seen in almost two decades.
The fact remains that five long years after Lehman Brothers went bankrupt and helped trigger the second epic equities crash in less than 10 years, mom-and-pop investors are still leery of the stock market.
On the other hand, you can’t fight the tape. Clearly the market sees something in these retail brokerage stocks. Here’s a quick look to help decide whether they’re worth the risk.
With a market cap of $28 billion, Schwab is the biggest retail brokerage by far — but that hasn’t insulated it from choppy client asset growth and hit-or-miss earnings.
On Monday, the company said August client assets jumped 12% year over year — but fell 2% from the prior month. The bottom line has been similarly herky-jerky. SCHW has missed Wall Street earnings estimates for two straight quarters after comfortably beating them for three in a row.
Perhaps the most attractive aspect of Schwab is that it has the wherewithal to grow its dividend. Too bad it still won’t be all that compelling. The forward yield stands at 1.1% vs. a five-year average of just 1.6%
Bottom Line: Rising interest rates will eventually help Schwab’s net interest margins, but earnings growth at this point is more about controlling costs than building client assets. SCHW is a “hold” at best.
Where Schwab has struggled with earnings and asset growth, TD Ameritrade has been cruising along.
The brokerage has beaten Wall Street’s earnings projections for four consecutive quarters. More impressively, AMTD’s client assets have grown for four straight years, and at an enviable rate. On an annualized basis, net new client assets have increased at a double-digit percent pace since 2008.
That’s partly attributable to AMTD’s strength in servicing registered investment advisers and other money managers with relatively small shops. It also helps that the online brokerage is associated with bricks-and-mortar Toronto-Dominion Bank (TD), which affords opportunities to cross-sell products.
Bottom Line: The 60%-plus gain has made the stock look a little pricey, at least on a relative valuation basis. Shares trade at a premium to their own five-year average by forward earnings. But its unmatched ability to bring in new client assets, strong balance sheet and robust cash flow mean the stock has more room to run. That makes AMTD a “buy.”
The discount brokerage was almost sunk by its bank business, but now that same business has the stock almost doubling for the year-to-date.
Regulators recently gave E*Trade’s bank subsidiary the green light to make a $100 million dividend payment to its parent. No, shareholders won’t get that cash, but the resumption of the payout — expected to be an ongoing $100 million a quarter — means E*Trade can pay down its debt.
Of course, that does nothing to address the problem of growth, which is nowhere to be found. Analysts forecast revenue to decline by more than 11% this year and to continue to shrink in 2014.
Bottom Line: Yes, E*Trade shares bounced back sharply as the company swung back to profitability — but the easy money in this resurrection play has already been made. The stock is up more than 90% for the year-to-date. Why be greedy? Sell at least part of you position and be thankful for the profits.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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