Online brokers can stop wearing out that old Aretha tune. Wall Street's finally giving up respect.
After two years of being heard only by
Credit Suisse First Boston's
Bill Burnham and a few others, cyberbrokers are making more and more analysts' play lists, including those of high-end firms like
The reasons behind this shift are diverse -- everything from the full-service industry's own move online to exploding market caps -- but the result has often been the same: higher stock prices as online brokers garner more attention.
Take Jersey City, N.J.-based
National Discount Brokers
. It finally got analyst coverage after its June 22 secondary offering from the two financial services research houses that worked on the deal,
U.S. Bancorp Piper Jaffray
The result was a rise of 60% in the stock on June 29 and 30. Before this, NDB had traded for more than 10 years (it changed its name from the
in 1997) with no major analyst coverage. It closed Friday at 54 3/16, down 4 13/16.
NDB isn't the only one getting more attention. The number of analysts covering the bigger online brokers such as
has nearly doubled this year.
For Michael Flanagan, an independent securities analyst who has followed the securities industry for the past seven years, the predominance of online trading means picking up the whole lot by the end of this year. That includes E*Trade, Ameritrade and
, not to mention newly public companies
"I've always viewed the traditional discount and online brokers as another group, but the
that it would add discount online trading blurred those lines and now the two businesses are commingling," Flanagan says
Flanagan and several other analysts say reasons to get into these stocks include growing market capitalizations and client demand. For instance, Schwab grabbed headlines early this year when its market cap topped Merrill Lynch's. It's now at $43.5 billion compared with Merrill's $28.2 billion.
"When E*Trade is bigger than
, it makes sense to cover it," says one analyst at a large firm.
Dan Burke, an analyst at Boston's
, a consulting firm created in 1997 to cover the Internet and online brokers, says growing investment banking is another explanation.
As the number of banks, check-payment and mortgage companies and real estate firms on the Internet explode, so does investment banking activity. That means investment banks will use their analysts to attract clients looking for underwriting or other advisory services. That also plays into the broader coverage phenomenon as some analysts who once strictly covered the online brokerage beat start expanding to financial services in a bid to lure banking business.
For example, in May, San Francisco-based
BancBoston Robertson Stephens
hired brokerage analyst Scott Appleby away from Dutch bank
specifically to do e-finance. Then in mid-June,
Hambrecht & Quist
picked up Greg Smith from boutique investment bank
Putnam Lovell de Guardiola & Thornton
for the same task.
But it's not just market cap or investment banking pulling in analysts. It seems old Wall Street has had a change of heart considering its younger cousins.
"I don't think
online trading was taken seriously," says Burke at Gomez. The Internet mania -- the stocks and the online trading -- differed from the logic of investment banking, he says. "They suddenly realized these are real companies and they're staying."
That happened just about the same time that
laid out its online plans and Merrill Lynch announced it would offer discount online trading. Other full-service brokers are due to follow.
Wall Street started playing catch-up with Ameritrade and E*Trade a few months ago when Goldman and
weighed in. (Goldman ended up dismissing one of its junior analysts in May after he reportedly plagiarized the title and passages of an E*Trade report by then-Putnam Lovell analyst Smith; Goldman declined to comment.)
DLJdirect, which tracks its parent company
Donaldson Lufkin & Jenrette's
stock, has coverage from the securities and Internet analysts at its underwriters
Morgan Stanley Dean Witter
That's the trend at most large firms, according to recruiters.
"Solly or Pru is going to need to cover Merrill Lynch and DLJdirect, and my expectation would be that in most cases, it will be the analysts who have been covering the brokerage firm itself who will expand rather than hiring from the outside," says Leslie Gordon, head of investment banking recruiting at
Wit Capital got coverage from its underwriters,
Thomas Weisel Partners
, which pushed up its stock. It and TD Waterhouse, a unit of
are also under consideration by analysts, including
Salomon Smith Barney
, which underwrote TD Waterhouse's offering.
Two new analysts are covering Schwab:
and Bear Stearns, and Salomon Smith Barney is considering coverage.
While underwriting is the driving force behind a lot of coverage,
CIBC World Markets
, which covers Schwab, plans on adding E*Trade, Ameritrade and TD Waterhouse this year. Lehman also is looking at adding broadly to its list. As Flanagan says, "You just can't avoid it."