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SIVY ON STOCKS from money.com
May 2, 2001 A bounce for the brokers Stocks such as Goldman Sachs, Merrill Lynch, and Morgan Stanley were up at least 5 percent on Wednesday -- and appear poised for even bigger gains. By Michael Sivy Most of the people I know are bearish on the shares of the company they work for. Particularly when business conditions are as difficult as they are right now, employees tend to focus on the short-term problems their companies are facing and ignore the long-term fundamentals. Perhaps that's the explanation for why analysts have recently been downgrading brokerage stocks. They look around their offices and see depressed profits and layoffs. Merrill Lynch's earnings fell 21 percent in the first quarter, for instance, as commissions declined 30 percent, trading revenue fell 15 percent and underwriting revenue dropped more than 6 percent. Things are so bad that Merrill Lynch and other major firms are planning to slash their head counts -- by attrition in some cases and outright layoffs in others. But those short-term problems mask the fundamentals that long-term investors should be paying attention to. At the most basic level, brokerages are proxies for the stock market, so if you expect a resumption of the bull market in the near future -- as I do -- you have to like the sector. And the fundamentals figure to keep improving. The economy should receive an enormous boost over the next nine months from the Federal Reserve's recent interest-rate cuts. And a large tax cut will encourage consumer demand. Plus, concessions to Congressional Democrats that allow for higher government spending will add further stimulus. Finally, potential Social Security reform that permits some form of privatization would be a direct benefit to financial-services firms. The stock market has already recognized what the brokerages' own analysts haven't. Stocks of the leading brokerages were up 5 percent on Wednesday, and many have rallied at least 25 percent from their 52-week lows. Still, these shares are hardly overvalued. Even after Wednesday's rally, the stocks are anywhere from 15 to 35 percent below their highs of the past seven months. Moreover, they still trade at less than 18 times estimated earnings for the current year. That isn't much given their projected long-term earnings growth of 13 percent or more. Among the leaders in the group, Goldman Sachs [GS], with a 13 percent growth rate, closed Wednesday at $98 a share for a 17 P/E; Merrill Lynch [MER], 13 percent growth, traded at $67 for a 17.5 P/E; and Morgan Stanley Dean Witter [MWD}, 14 percent, closed at $66.50 for a 16 P/E. Investors might also want to consider A.G. Edwards [AGE] as an undervalued takeover play. The leading independent brokerage based outside of New York, A.G. Edwards of St. Louis trades at $43 for a P/E of less than 14. The trend toward financial services behemoths threatens to chip away at Edwards' market share. But industry consolidation could also make Edwards a takeover target, not only for major brokerages but also for the big banks. Whether the stock is taken over or not, it's cheap based on fundamentals -- especially since it got up to nearly $58 a share when takeover rumors heated up last summer. ### Post your comments on Michael's column at: http://www.money.com/depts/investing/sivy/index.html To subscribe or unsubscribe to Sivy on Stocks, go to: http://www.money.com/email/ ----------------------------------------------------------- MARKETPLACE ----------------------------------------------------------- CONTACT THE BIGGEST COMPANIES IN THE WORLD! Over 5,000 contact names in the OFFICIAL FORTUNE Databases. DOWNLOAD THEM NOW! http://www.fortune.com/datastore/?mn1 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Special Internet Offer!!! Sign up for a RISK-FREE issue of MONEY MAGAZINE at http://www.money.com/subscribe2 Or if you prefer call our toll-free number 1-800-544-4594 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * We may, from time to time, contact you with offers for Time Inc. products and services which we think may be of interest to you. If you would prefer us not to contact you in this manner, AND YOU DID NOT INDICATE THIS PREFERENCE AT THE TIME YOU SIGNED UP for the Sivy on Stocks online newsletter or any other Time Inc. online newsletters, please let us know by sending us an e-mail at <no_solicit@money.com<. Additionally, from time to time we may provide your e-mail address to carefully chosen companies whose offers we think may be of interest to you. If you would prefer us not use your e-mail address in this manner, AND YOU DID NOT INDICATE THIS PREFERENCE AT THE TIME YOU SIGNED UP for the Sivy on Stocks online newsletter or any other Time Inc. online newsletter, please let us know by e-mailing us at <no_transfer@money.com<.
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