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Can Regional Brokers Keep Outperforming?

At their worst, regional firms still do better -- or not as bad -- as the big guys. Just check the 12-month performance of the giants vs. Stifel, SWS and Raymond James Financial (RJF - Get Report). At their best, regionals can outperform Warren Buffett.

That last description belongs to Stifel Financial, the St. Louis-based financial holding company for the Stifel Nicolaus brokerage.

On a split-adjusted basis, Stifel's stock was up28% for the 12 months ended Feb. 5. The S&P 500 was down about 37%. Buffett's Berkshire Hathaway (BRK.A) was off 36%.

Over a five-year period, Stifel's stock has nearly tripled, while Berkshire Hathaway is slightly in the black and the S&P 500 is definitely in the red. The big-shot investment banking firms don't come close to Stifel, and neither do the financial supermarkets.

"Stifel is one of the best mid-market investment banks," says Michael Wong, an analyst at the independent research firm Morningstar.

With investment operations "that won't fall off a cliff," the worst thing Wong can say about Stifel is that its stock is "a bit overvalued." Morningstar's three star-rating (out of five) means its fairly valued by the firm's standards.

Since the middle of this decade, Stifel has made several acquisitions to bolster its financial advisory efforts and expand its geographic reach. It also bought a small bank in 2007, but banking represents a small portion of its revenue.

Expansion has "artificially" depressed margins, says Wong, noting that Stifel has capitalized on the bloodshed at big investment banks by hiring more advisers. During the first nine months of 2008, Stifel added 140. And on Feb. 12, it reported October-December earnings per share of 72 cents, excluding one-time items, which beat the Wall Street average estimate of 57 cents. Revenue of $228 million topped the consensus of $219 million, according to Thomson Reuters.

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