Can Brokerage Stocks’ Big Move Continue?

by Daniel Putnam | January 24, 2013 6:30 am

One result of stocks’ two-month run-up is that the market currently has more than its share of sectors that seemingly have come too far, too fast. Areas as unrelated as transports, social media and homebuilders all appear ripe for a pause after two months of outstanding performance.

While these groups have received plenty of attention for their recent rallies, another group — brokerage stocks — has largely stayed out of the spotlight. But that doesn’t mean the performance results aren’t there. Since the most recent low on Nov. 15, the returns for the largest players in this group have been exceptional:

Charles Schwab (NYSE:SCHW[1]): +23.4%
TD Ameritrade (NYSE:AMTD[2]): +23.5
E*Trade Financial
(NASDAQ:ETFC[3]): +32.1%

The most important reason for the strong performance is the return of asset inflows into retail brokers. Individual investors appear to have returned[4] after years on the sidelines following the 2007-08 financial crisis, creating a flood of assets into brokerage accounts during the final three months of last year.

TD Ameritrade, for instance, took in a record $15.6 billion in new assets in the fourth quarter versus $10 billion during the same period in 2011, while Schwab reported an increase of 900,000 accounts and a 16.5% year-over-year gain in assets. E*Trade reports on Thursday.

Naturally, the sector also has benefited from the strong performance of both the market in general and the financial sector in particular. Over time, the brokerage group tends to have a decent correlation with the S&P 500 and a strong 0.9 correlation with the Financial Select Sector SPDR (NYSE:XLF[5]). XLF is 14.7% since Nov. 15 — way ahead of the 10.7% gain for the broader market.

While betting against momentum stocks is death right now, it’s at least time to take some money off the table in these names. It’s true that the news flow is positive and that the stocks are finally recovering after years of underperformance in the wake of the crisis. But at these levels, their valuations are becoming stretched in relation to their growth prospects. The table below lays out the vitals for the big three:

SCHW 22.6 18.1 5.8% $0.87 to $0.86 $15.71 / $15 1.6%
AMTD 17.6 15.4 0.9% $1.09 to $1.07 $19.03 / $18 2.0%
ETFC 44.8 19.4 n/a $0.53 to $0.53 $10.38 / $9.50 n/a

From a technical standpoint, the brokers look good. Schwab hit a 52-week high on Tuesday, while E*Trade and TD Ameritrade are both in the midst of strong moves off of extended bases. In addition, all three are comfortably above their 200-day moving averages, while Ameritrade and E*Trade both experienced recent “golden crosses,” with the 50-day moving average crossing the 200-days.


These factors argue against trying to short these stocks here, even if they’re starting to look a little overextended. Instead, the better bet is to wait for a pullback if you’re looking at these names. And if you already own them, consider taking advantage of this run-up by selling calls.

Investor optimism is gradually moving off the charts right now, and there is likely little to be gained by trying to chase the winners much further.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.

  1. SCHW:
  2. AMTD:
  3. ETFC:
  4. Individual investors appear to have returned:
  5. XLF:
  6. [Image]:

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