Lehman Brothers Dons Brokerage Crown

It's been a banner year for brokerage stocks, but few have outshone Lehman Brothers(LEH).

To date, shares of the Wall Street firm are up a robust 45%, far outpacing the 30% gain racked up this year by the Amex Broker Dealer Index. And it's no contest comparing Lehman's performance with the meager, single-digit gains posted by the three major market indices.

Look for Lehman to help set the pace in the brokerage sector when it reports fourth-quarter earnings next week, along with Bear Stearns(BSC), Goldman Sachs(GS) and Morgan Stanley(MWD).

On the basis of the latest Thomson Financial estimates, analysts expect earnings at Lehman to rise 34% in the fourth quarter, which ended Nov. 30. Only Goldman Sachs is expected to do better, with earnings predicted to rise 40% over the same period last year.

Bear Stearns and Morgan Stanley are likely to be the laggards. Analysts expect earnings at both securities firms to be largely unchanged from a year ago.

Earnings at Bear Stearns also could be weighed down by another legal charge stemming from the firm's involvement in the more than two-year-old mutual fund trading scandal. Bear, after six months of heated negotiations, is close to reaching a final settlement with the Securities and Exchange Commission, sources say.

To date, Bear Stearns has set aside at least $200 million to cover the cost of reaching a settlement; sources expect a final deal to exceed $300 million. A Bear Stearns spokesman declined to comment on the investigation.

But the big story next week undoubtedly will be Lehman's continuing transformation into a diversified securities firm that's no longer just associated with bond trading and debt underwriting. Much of Lehman's metamorphosis can be attributed to its shrewd purchase of the asset-management firm Neuberger Berman in 2003 and a timely decision to beef up its merger-and-acquisition investment-banking group.

The wisdom of those moves is being borne out in this year's results.