Brokerage Firm Stocks: Just Getting Started

by James Brumley | June 19, 2013 10:17 am

Think brokerage stocks are a dime a dozen for investors — mere clones of one another?

Think again.

All of them have been on a roll lately, as the market’s foray into record territory has drawn a trading crowd again. But, there’s a big disparity within the group. The online-trading firms like Charles Schwab (SCHW[1]) and TD Ameritrade (AMTD[2]) have seen their shares soar coming out of the April slump, while more diversified brokerage names Goldman Sachs (GS[3]) and Raymond James (RJF[4]) have been lagging the group at large.

For perspective, since April 18, Goldman Sachs shares have advanced 18.4%. Bank of America’s (BAC[5]) stock is up 16% since then. Both have easily topped the broad market’s 7% gain for the same timeframe.

Impressed? Well, hang on to your hat — it gets better. Shares of online-trading firms TD Ameritrade, Charles Schwab and E-Trade (ETFC[6]) have gained 26%, 25% and 26%, respectively, since April 18.

It all raises two questions: Why? And how much longer will the disparity last?


The reason for the web-trading-led rally depends on who you ask, but all of the proposed reasons ultimately stem from growing trading mania.

Not unlike the way dot-com mania pulled amateur investors into game in the late 90’s, the rally since late last year has carried most stocks to record highs … the kind of thing folks watching from the sidelines don’t want to miss any more of. As more and more money comes off the sidelines, they have to use the middleman — brokers — to get on the game. As those traders put more money into the market and drive the market higher, new tranches of investors plow in, also chasing the trend. The end result is a lot of stock trading.

The traditional brokerage firm players that are still left like Raymond James or Bank of America’s Merrill Lynch certainly captured enough of the new trading business. However, most newcomers seek out the lower-priced (and more accommodating) web-trading firms like E-Trade and Schwab.

And make no mistake, traders are more active now than they have been of late. Schwab’s daily average trade count was up 17% last month compared to April’s total, and up 8% from April of this year. E-Trade’s activity for May was 15% stronger than April’s daily average trade, and 11% higher than May trade count last year. Ameritrade’s trading activity for May was up 13% on a year-over-year basis, and 9% higher compared to April’s total.

Perhaps even more telling is the fact that all three firms have a lot more client money in their care now than they did a year ago. For TD Ameritrade, client assets now are 23% higher than they were in May 2012. Schwab’s year-over-year asset growth hit 20%.

Some of that increase in assets-under-management has been fueled by sheer stock gains. Much of it, however, has simply been fueled by folks pouring back into the market of late … despite that fact that they’re buying in after a very frothy run-up.

Now What?

While all the online-broker stocks are pushing their luck — in terms of valuation — thanks to the recent rally, it’s not like they’ve moved beyond all decency. They’ve just priced in the best-case scenario. Then again, the numbers above speak for themselves … trading activity is cranking up. The question is whether they’ll continue to grow at the same pace for a few more quarters.

Framed in those terms, a bet on the brokerage stocks ultimately becomes a bet on the economy’s continued growth. That could be a bit of a problem, as actual economic growth has been on the tepid end of the scale for the year so far. As veteran traders know, however, the market is predictive rather than reactive. If investors can’t get enough of stocks, then the economy should start to justify it sooner than later.

While anything can and will happen, this might put things in perspective for traders who don’t think the brokerage stocks even deserved the gains they’ve made for the year so far — there’s still more money on the sidelines than what has been put back into the market.

As of the latest data, there’s $2.6 trillion worth of money market holdings in the United States. That’s about 17% of the entire market capitalization of the S&P 500. It doesn’t even count a huge cache of money currently held in bond funds that, to be blunt, aren’t making investors any meaningful amount of money. That’s a lot of cash and near-cash paper that could be injected into the equity market, as stock purchases from individuals, or as stock buybacks from companies.

And, that transition could already be underway. The Investment Company Institute reports that since 2011, we’ve not seen a single month of net outflows from bond funds. During the first week of June, however — after Bernanke warned the Fed would be dialing back on its bond buying — Lipper says bond fund net outflows reached a hefty $9.1 billion. Where’s all that cash going? While it wouldn’t be accurate to say it all got put back into the stock market, clearly it went somewhere … even if it’s only being stored as cash, waiting to be invested in equities.

The bottom line is, though the online-trading brokers’ stocks are a tad overbought right now, the market might well have the right idea about their future.

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

  1. SCHW:
  2. AMTD:
  3. GS:
  4. RJF:
  5. BAC:
  6. ETFC:

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