NEW YORK (TheStreet) -- Financial reform is coming, whether the big banks like it or not. This slideshow looks at four individual companies and one sector that could outperform under the revamped regulations.
Jefferies & Co.
How does getting in on a miniature version of
sound? Probably not as good as it did a few weeks ago, but
Jefferies & Co.
is an intriguing option for investors to consider if reform legislation hobbles the likes of Goldman and
with size limits as called for by the Volcker rule.
Like those firms, Jefferies combines investment banking advice with trading and research. But the company doesn't draw the same attention from regulators. It is not too big to fail, and it does not rely on implicit government guarantees. That means it is free to ratchet up the risk, and the firm has shown by surviving the crisis that it will not go too far in that regard.
On Tuesday, Jefferies delivered first-quarter earnings of $74 million, or 36 cents a share, up from a year-ago profit of $38 million, or 19 cents a share, and 3 cents ahead of Wall Street's consensus estimate. Revenue jumped 71% year-over-year to $583 million for quarter.
The stock has slumped roughly 10% in the wake of the report, however, a drop that Keefe, Bruyette & Woods attributed to the company reporting revenue from fixed income trading that "paled in comparison to peers" although it was still the biggest contributor to the company's top line.
KBW reiterated an outperform rating on the stock following the report, saying there was a disconnect between the results and the sell-off. The firm's 12-month price target for the shares is $31, implying upside of more than 20% from Thursday's closing price of $25.73.
Written by Dan Freed in New York
is one of the most successful of the so-called advisory boutiques, a group that includes several privately-held companies like
Moelis & Company
, as well as publicly-traded names like
Greenhill & Co.
(though Lazard, which has more than 2,000 employees, gets annoyed when you call them a boutique).
These firms are comprised of investment banking stars who often come from big Wall Street banks like Goldman and Morgan Stanley, but quit because they want to give advice to CEOs rather than sell them products. At least that's their sales pitch.
The pitch should work better than ever these days, as revelations about, say, how
because he thought the firm's traders might exploit sensitive information that would hurt the lender. Many of the financial reforms being contemplated in Washington would weaken the big investment banking firms, which can only help their smaller competitors.
Evercore may have a special leg up because its Chairman, Roger Altman, is one of Wall Street's most prominent Democrats. Corporate CEOs, many of whom are Republicans, may want to enlist a guy like Altman to help make their case in Washington with the party that is running the show.
Shares of Evercore are up 12% year-to-date, but first-quarter results this week came in slightly short of Wall Street's consensus view, held back by expenses related to acquisitions and expansion. President and CEO Ralph Schlosstein (pictured above) touted more the company's progress toward strategic objectives -- such as increasing advisory capabilities in different sectors -- than its actual performance. William Blair & Co., which reiterated its outperform rating on the stock following the report, agreed and it sees further appreciation from here.
"We believe the stock can trade closer to 20 times our 2011 estimate over the next 12 months as the improvements in the overall M&A environment gain a firmer footing, and we expect significant earnings growth in 2012 as well," William Blair said.
Written by Dan Freed in New York
It is increasingly starting to look like any reform legislation will call for a big chunk of the $600 trillion over-the-counter derivatives market to be traded on an exchange.
While that's bad news for
and other Wall Street banks, it's good news for the publicly traded exchanges, including
, Chicago Mercantile Exchange operator
Nasdaq OMX Group
The biggest beneficiary, however, may be
. ICE didn't exist until 10 years ago, but it has quickly become the leading clearinghouse for credit default swaps. Originally backed by a group of Wall Street banks, it is now independent, but CEO Jeff Sprecher remains a favorite among top Wall Street executives like Goldman President Gary Cohn, who helped set him up in business.
If Wall Street is forced to share its highly lucrative OTC derivatives business, it is a good bet Sprecher and ICE will grab a big chunk of it.
While clearing of interest rate swaps is the biggest opportunity and ICE has no offering in this area yet, it has proven itself to be the most nimble U.S. exchange in recent years. The fact that it lags competitors on interest rate swaps only means there's more upside in the stock should it appear out of nowhere to snatch away this market, or another one that hasn't been identified yet.
Written by Dan Freed in New York
Charles Schwab Corp.
, the traditional discount brokerage which has transformed itself in recent years into a full-service financial services firm, could see a boost from financial reform as well.
Transparency in the over-the-counter derivatives market could conceivably lead to more interest in these instruments from retail investors, a development that would help all the online brokers if it leads to increased trading.
Investors in general are becoming more sophisticated and looking for increased diversification in their financial portfolios. Schwab's customer base includes plenty of individual investors, but the company also has relationships with independent financial advisors who serve high-net-worth individuals are also a large part of the company's clientele through its asset management business, which provided more than 40% of the company's total revenue in the latest quarter.
Schwab, with $1.49 trillion in client assets, has been aggressive about trying to meet the needs of these customers, and it took another step on Thursday when it announced a joint agreement with JPMogran to offer select fixed income products including the big bank's new-issue and secondary municipal bonds, corporate debt securities, non-convertible preferred securities as well as giving access to its fixed income research to its customers.
Whether or not investors are interested in testing out a credit default swap remains to be seen, but if increased transparency comes to pass, investor curiosity is sure to follow.
Written by Laurie Kulikowski in New York
Smaller Regional Banks
With the regulatory crack-down targeting "too big to fail" banks, it's not hard to guess which other firms will benefit: Small, sturdy regionals.
Federal Deposit Insurance Corp.
dozens of assisted deals for smaller banks across the country that have healthy balance sheets and room to grow. The FDIC has about $40 billion in assets up for grabs from failed banks. The agency has seized 225 institutions since the start of the crisis, 50 this year alone. Hundreds more are predicted to go under before it ends.
Most sales occur at the time of failure, with the FDIC structuring loss-share agreements on books of bad loans in order to quickly sell deposits and other assets to stable, willing buyers. The situation has presented attractive deals for banks like
(whose CEO Ron Hermance is pictured above),
and others -- the type of small, conservative S&Ls that FDIC Chairwoman Sheila Bair has voiced strong support for.
As those deals transpire, big banks are facing regulatory and economic pressures to whittle down. If the Obama administration's Volcker rule proposal succeeds, it will force large, diverse firms like
Bank of America
to chop off either their investment banking or traditional banking divisions. Otherwise, they may be required to pay into a resolution fund that would handle too-big-to-fail firms in case they...well...fail.
Other measures on derivatives trading, leverage, capital, liquidity and consumer protection will generally make their operations more costly and less profitable.
But the new restrictions won't have as much of an impact on smaller banks that make money -- albeit less money -- by simply taking in deposits, making loans and providing basic financial services. In fact, it will level the playing field and provide handsome opportunities for growth. This
highlights Hudson City as a top pick among U.S. bank and thrift holding companies with total assets between $10 billion and $100 billion.
-- Written by Lauren Tara LaCapra in New York