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 Quote - Cramer on MER - Stock Picks), 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 Quote - Cramer on GBL - Stock Picks),
Black
Rock(BLK Quote - Cramer on BLK - Stock Picks),
Affiliated Managers Group(AMG Quote - Cramer on AMG - Stock Picks) and
Franklin Resources(BEN Quote - Cramer on BEN - Stock Picks).
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.
Arne Alsin
RSS
