For Online Brokers, It's Been a Long Road to Respect

After two years of laboring without much attention, cyberbrokers are finally getting coverage from white-shoe analysts.
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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

Goldman Sachs

(GS) - Get Report

.

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

(NDB)

. It finally got analyst coverage after its June 22 secondary offering from the two financial services research houses that worked on the deal,

Deutsche Bank

and

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

Sherwood Group

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

E*Trade

(EGRP)

and

Ameritrade

(AMTD) - Get Report

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

Schwab

(SCH)

, not to mention newly public companies

DLJdirect

(DIR)

,

TD Waterhouse

(TWE)

and

Wit Capital

(WITC)

.

"I've always viewed the traditional discount and online brokers as another group, but the

Merrill

(MER)

announcement

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

PaineWebber

(PWJ)

, it makes sense to cover it," says one analyst at a large firm.

Dan Burke, an analyst at Boston's

Gomez Advisors

, 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

ABN Amro

specifically to do e-finance. Then in mid-June,

Hambrecht & Quist

(HQ)

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

Prudential Securities

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

Lehman

(LEH)

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

(DLJ)

stock, has coverage from the securities and Internet analysts at its underwriters

Morgan Stanley Dean Witter

(MWD)

and Merrill.

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

Korn/Ferry International

.

Wit Capital got coverage from its underwriters,

Thomas Weisel Partners

and

Bear Stearns

(BSC)

, which pushed up its stock. It and TD Waterhouse, a unit of

Toronto Dominion

(TD) - Get Report

are also under consideration by analysts, including

Salomon Smith Barney

, which underwrote TD Waterhouse's offering.

Two new analysts are covering Schwab:

Pacific Crest

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."