Can Regional Brokers Keep Outperforming?

So how long can Stifel be called "regional?" Formerly known for its Midwest focus, Stifel now operates in 36 states and the District of Columbia. It has three European offices.

Dallas-based SWS has even less Wall Street coverage (two sell-side analysts) than Stifel (four sell-side analysts). It's stock gained 24% for the 12 months ended Feb. 5. It's five year-return isn't as good as Stifel's, but who's arguing with a split-adjusted gain of about 80%?

SWS just released October-December results in which earnings per share of 33 cents beat estimates by 6 cents. Revenue rose to $100 million vs. $72 million for the same period in 2007, thanks partly to a brokerage acquisition.

"We believe that revenue and EPS growth will likely be driven by acquisition," says a recent report by Keefe Bruyette & Woods.

SWS feels confident enough to avoid TARP money. "It's our opinion that we can keep the Bank well capitalized without the risk and uncertainties of the terms for accepting the government money," CEO Donald Hultgren told analysts during a Feb. 4 conference call. (Stifel Financial isn't seeking TARP money either). SWS subsidiaries include Southwest Securities, SWS Financial Services and the banking unit Southwest Securities FSB. The company operates in 50 states.

SWS could be under pressure for the rest of 2009 and 2010 due to the recession's impact on investors in general and to the fear that the Texas economy will weaken, says KBW. That would hurt SWS's bank subsidiary, municipal finance business and its commissions.

"With energy prices well below their peak levels of 2008, we believe that the state's economy will begin to weaken and could present concerns for SWS's businesses," says a mid-January KBW report maintaining a market perform rating. KBW's analysts don't own shares, but their firm has had a recent noninvestment banking relationship.

Raymond James Financial is larger, with market cap of $2.4 billion, than Stifel and SWS combined. It can brag that it beat the big guys and the S&P 500 over the last 12 months, but its stock was still down about 20%.

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