While the end of this bear market is impossible to time with precision, it will be the brokerage sector, as always, that will lead the charge out the gate. The brokers will spurt ahead in the midst of all the doom and gloom, surprising most market participants.

But it shouldn't be a surprise. These well-capitalized companies are always heavily discounted in bear markets and they tend to stage fierce rallies several months in advance of improvement in business conditions.

How to Analyze the Brokers

While I haven't looked at any Wall Street research on the brokerage sector, I think I'm safe in assuming that you won't find my methodology for analyzing brokers anywhere else. Most investors focus on the investment banking and commission business of brokers - but these are cyclical, rising and falling in tandem with the market. Instead, I like to analyze brokers by concentrating on their value outside of investment banking and commissions. Here are the steps I use to calculate what I call their core value, exclusively for RealMoney.com readers.

Step No. 1: Calculate the amount of cash or cash equivalents (assets readily convertible into cash) for each broker and subtract all debt (both short- and long-term debt) to arrive at net cash. As you can see from the table below, net cash -- again, this is after all debt -- is significant for every broker relative to share value.

	Symbol	Mkt Cap ($ Mil.)	Net Cash* ($ Mil.)	$Cash/Share	$Share Price	% Cash
Merrill Lynch	MER	31611.00	8511.00	10.10	37.65	27%
Goldman Sachs	GS	32870.00	6416.00	13.20	67.69	20
Morgan Stanley	MWD	44489.00	3559.00	3.20	40.08	8
Charles Schwab	SCH	13110.00	2956.00	2.10	9.50	22
Legg Mason	LM	2277.00	483.00	7.60	35.75	21
Raymond James	RJF	1250.00	419.00	8.80	26.10	34
*Net Cash = cash equivalents less all debt Figures as of Sept. 21

Step No 2: In addition to net cash, I have carefully evaluated each broker's high margin, noncyclical, money-management business. Merrill Lynch (MER:NYSE - news - commentary - research), for example, has a significant family of mutual funds, the value of which should not be ignored simply because the bear market is depressing other parts of Merrill's business, such as commissions and investment banking.

I used a number of metrics to determine a conservative value for each money-management business, and considered valuations of publicly traded managers such as Gabelli Asset Management (GBL:NYSE - news - commentary - research), Black Rock (BLK:NYSE - news - commentary - research), Affiliated Managers Group (AMG:NYSE - news - commentary - research) and Franklin Resources (BEN:NYSE - news - commentary - research).

When the value of each broker's money-management business is combined with net cash, the current undervaluation of brokerage stocks is startling. Remember, the calculation below gives no credit to the other businesses of brokers such as commission and trading, investment banking, market making or research services.

	Symbol	$Cash/Share	Money Mgmt Per Share $	$Cash Plus Money Mgmt	$Share Price	Cash Plus Money Mgmt
Merrill Lynch	MER	10.10	15.78	25.88	37.65	69%
Goldman Sachs	GS	13.20	15.01	28.21	67.69	42
Morgan Stanley	MWD	3.20	6.58	9.78	40.08	24
Charles Schwab	SCH	2.10	1.52	3.62	9.50	38
Legg Mason	LM	7.60	34.38	41.98	35.75	117
Raymond James	RJF	8.80	8.87	17.67	26.10	68
Figures as of Sept. 21

With huge amounts of cash equivalents, net of all debt, and hidden value in their money-management business, all of the brokers above are attractive at current prices. I'm working on a follow-up column which takes the analysis a couple of steps further, and isolates the best two or three opportunities in the group.