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2 Investment Banks to Buy Despite Muted Industry Prospects
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Given the reversal in corporate debt and equity issuances and deal-making activities, the Zacks Investment Bank industry is expected to witness a turnaround in investment banking fees in the quarters ahead.
Yet, normalized/volatile client activity in the trading business is expected to hurt trading revenues in the near term. While costs related to technological upgrades might impede bottom-line growth, industry players will eventually witness improved operating efficiency. These factors will keep aiding investment banks like Interactive Brokers Group, Inc. (IBKR - Free Report) and Robinhood Markets, Inc. (HOOD - Free Report) .
Industry Description
The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments and financial institutions worldwide. These started as partnership firms focused on initial public offerings (IPOs), secondary equity offerings, brokerage and mergers and acquisitions (M&As). Gradually, the companies have evolved into providers of various other services, including securities research, proprietary trading and investment management. Therefore, the industry players work mainly through three product segments — investment banking (M&As, advisory services and securities underwriting), asset management and trading and principal investments (proprietary and brokerage trading).
3 Themes to Influence the Investment Bank Industry
Resurgence in Underwriting and Advisory Businesses: After a prolonged weakness in underwriting, IPOs and deal-making activities since 2022 due to geopolitical tensions and global macroeconomic concerns, green shoots in advisory and underwriting businesses are visible with the deal pipeline looking healthy. With the macroeconomic environment steadying and the corporates adjusting to the high-rate regime, global underwriting and M&A activities are on a path to a sustained recovery in the coming days. Though the ride will likely be bumpy for investment banks in the near term, the improving operating backdrop will support the industry players’ top-line growth.
Technology to Improve Operating Efficiency: Innovative trading platforms, the use of artificial intelligence (AI) and investments in technology and advertising will likely aid the operations of investment banks. The industry players are attracting and retaining the best talent for building a leadership team and spending heavily on technology to help clients with infrastructure development and new platforms. While the industry players are likely to face increasing technology-related expenses in the near term, these initiatives are expected to improve operating efficiency over time.
Normalized Trading Business: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. Since 2022, market volatility has significantly increased due to several geopolitical and macroeconomic headwinds. Though there has been some stability in the macroeconomic backdrop of late as inflation is cooling down, markets continue to grapple with higher interest rates and other geopolitical matters. But these factors seem to have been already priced in the markets. So, trading volumes are expected to remain subdued compared with pandemic days. Hence, trading income is likely to normalize over time.
Zacks Industry Rank Indicates Grim Prospects
The Zacks Investment Bank industry is a 14-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #173, which places it in the bottom 31% of more than 245 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a weak earnings outlook for the constituent companies in aggregate.
Before we present a couple of stocks that you may want to bet on, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Investment Bank industry has underperformed its sector and the S&P 500 over the past two years. While stocks in the industry have collectively gained 28.6%, the S&P 500 composite has rallied 32.9% and the Zacks Finance sector has risen 28.9%.
Two-Year Price Performance
Industry Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), commonly used for valuing investment banks because of significant variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 4.37X, above the median level of 3.38X, over the past five years. The industry is trading at a considerable discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 15.04X and the median level is 13.81X.
Price-to-Tangible Book Ratio (TTM)
Finance stocks typically have a lower P/TBV ratio, so comparing investment banks with the S&P 500 may not make sense to many investors. However, comparing the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at almost the same level. The Zacks Finance sector’s trailing 12-month P/TBV ratio of 4.36 for the same period is almost on par with the Zacks Investment Bank industry’s ratio.
Price-to-Tangible Book Ratio (TTM)
2 Investment Banks Worth Investing
Interactive Brokers: This Zacks Rank #1 (Strong Buy) company operates as an automated global electronic market maker and broker. The company, based in Greenwich, CT, specializes in routing orders, apart from executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 135 electronic exchanges and market centers worldwide. You can see the complete list of today’s Zacks #1 Rank stocks here.
Since its inception, Interactive Brokers has been focusing on developing proprietary software to automate broker-dealer functions, resulting in steady top-line improvement. Also, innovative products and measures undertaken to enhance global presence are expected to strengthen the company’s position in the online brokerage space.
Though rising expenses are a deterrent, IBKR continues exploring opportunities in emerging markets. Further, given the rapid growth of its European business, the company has substantially expanded its operations there. These efforts help diversify its operations and gain revenue stability.
Shares of IBKR, which has a market cap of $50.5 billion, have surged 44.3% this year. The Zacks Consensus Estimate for earnings has been revised 4.2% north to $6.76 for 2024 in the past 30 days.
Price and Consensus: IBKR
Robinhood: This Zacks Rank #2 (Buy) company operates through a platform. The company allows its users to invest in stocks, exchange-traded funds (ETFs), American depository receipts, options, gold and cryptocurrencies.
Robinhood became extremely popular among younger generations riding on the meme stock wave in early 2021. Yet, since its IPO in July 2021, a lot has happened on its business front. The company has evolved from a brokerage firm mainly trading in digital assets to become a much more mature and diversified entity as it expanded into retirement and credit card accounts.
HOOD is also expanding through strategic acquisitions. Earlier this month, it acquired Pluto Capital Inc., an innovative AI-powered investment research platform. Further, as part of its broader strategy to expand its global and domestic footprint and become a comprehensive financial services provider, the company announced plans to acquire Bitstamp, the global cryptocurrency exchange, in June.
These moves underscore Robinhood's commitment to diversifying its product offerings beyond traditional transaction-related revenues. Also, the company launched its trading app in the U.K. this March and is contemplating offering cryptocurrency futures in the United States and Europe.
Robinhood has a market cap of $18.6 billion. So far this year, the company’s shares have soared 66.3%. The Zacks Consensus Estimate for ongoing-year earnings has been revised 1.8% upward to 57 cents in the past month.
Price and Consensus: HOOD
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2 Investment Banks to Buy Despite Muted Industry Prospects
Given the reversal in corporate debt and equity issuances and deal-making activities, the Zacks Investment Bank industry is expected to witness a turnaround in investment banking fees in the quarters ahead.
Yet, normalized/volatile client activity in the trading business is expected to hurt trading revenues in the near term. While costs related to technological upgrades might impede bottom-line growth, industry players will eventually witness improved operating efficiency. These factors will keep aiding investment banks like Interactive Brokers Group, Inc. (IBKR - Free Report) and Robinhood Markets, Inc. (HOOD - Free Report) .
Industry Description
The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments and financial institutions worldwide. These started as partnership firms focused on initial public offerings (IPOs), secondary equity offerings, brokerage and mergers and acquisitions (M&As). Gradually, the companies have evolved into providers of various other services, including securities research, proprietary trading and investment management. Therefore, the industry players work mainly through three product segments — investment banking (M&As, advisory services and securities underwriting), asset management and trading and principal investments (proprietary and brokerage trading).
3 Themes to Influence the Investment Bank Industry
Resurgence in Underwriting and Advisory Businesses: After a prolonged weakness in underwriting, IPOs and deal-making activities since 2022 due to geopolitical tensions and global macroeconomic concerns, green shoots in advisory and underwriting businesses are visible with the deal pipeline looking healthy. With the macroeconomic environment steadying and the corporates adjusting to the high-rate regime, global underwriting and M&A activities are on a path to a sustained recovery in the coming days. Though the ride will likely be bumpy for investment banks in the near term, the improving operating backdrop will support the industry players’ top-line growth.
Technology to Improve Operating Efficiency: Innovative trading platforms, the use of artificial intelligence (AI) and investments in technology and advertising will likely aid the operations of investment banks. The industry players are attracting and retaining the best talent for building a leadership team and spending heavily on technology to help clients with infrastructure development and new platforms. While the industry players are likely to face increasing technology-related expenses in the near term, these initiatives are expected to improve operating efficiency over time.
Normalized Trading Business: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. Since 2022, market volatility has significantly increased due to several geopolitical and macroeconomic headwinds. Though there has been some stability in the macroeconomic backdrop of late as inflation is cooling down, markets continue to grapple with higher interest rates and other geopolitical matters. But these factors seem to have been already priced in the markets. So, trading volumes are expected to remain subdued compared with pandemic days. Hence, trading income is likely to normalize over time.
Zacks Industry Rank Indicates Grim Prospects
The Zacks Investment Bank industry is a 14-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #173, which places it in the bottom 31% of more than 245 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a weak earnings outlook for the constituent companies in aggregate.
Before we present a couple of stocks that you may want to bet on, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Investment Bank industry has underperformed its sector and the S&P 500 over the past two years. While stocks in the industry have collectively gained 28.6%, the S&P 500 composite has rallied 32.9% and the Zacks Finance sector has risen 28.9%.
Two-Year Price Performance
Industry Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), commonly used for valuing investment banks because of significant variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 4.37X, above the median level of 3.38X, over the past five years. The industry is trading at a considerable discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 15.04X and the median level is 13.81X.
Price-to-Tangible Book Ratio (TTM)
Finance stocks typically have a lower P/TBV ratio, so comparing investment banks with the S&P 500 may not make sense to many investors. However, comparing the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at almost the same level. The Zacks Finance sector’s trailing 12-month P/TBV ratio of 4.36 for the same period is almost on par with the Zacks Investment Bank industry’s ratio.
Price-to-Tangible Book Ratio (TTM)
2 Investment Banks Worth Investing
Interactive Brokers: This Zacks Rank #1 (Strong Buy) company operates as an automated global electronic market maker and broker. The company, based in Greenwich, CT, specializes in routing orders, apart from executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 135 electronic exchanges and market centers worldwide. You can see the complete list of today’s Zacks #1 Rank stocks here.
Since its inception, Interactive Brokers has been focusing on developing proprietary software to automate broker-dealer functions, resulting in steady top-line improvement. Also, innovative products and measures undertaken to enhance global presence are expected to strengthen the company’s position in the online brokerage space.
Though rising expenses are a deterrent, IBKR continues exploring opportunities in emerging markets. Further, given the rapid growth of its European business, the company has substantially expanded its operations there. These efforts help diversify its operations and gain revenue stability.
Shares of IBKR, which has a market cap of $50.5 billion, have surged 44.3% this year. The Zacks Consensus Estimate for earnings has been revised 4.2% north to $6.76 for 2024 in the past 30 days.
Price and Consensus: IBKR
Robinhood: This Zacks Rank #2 (Buy) company operates through a platform. The company allows its users to invest in stocks, exchange-traded funds (ETFs), American depository receipts, options, gold and cryptocurrencies.
Robinhood became extremely popular among younger generations riding on the meme stock wave in early 2021. Yet, since its IPO in July 2021, a lot has happened on its business front. The company has evolved from a brokerage firm mainly trading in digital assets to become a much more mature and diversified entity as it expanded into retirement and credit card accounts.
HOOD is also expanding through strategic acquisitions. Earlier this month, it acquired Pluto Capital Inc., an innovative AI-powered investment research platform. Further, as part of its broader strategy to expand its global and domestic footprint and become a comprehensive financial services provider, the company announced plans to acquire Bitstamp, the global cryptocurrency exchange, in June.
These moves underscore Robinhood's commitment to diversifying its product offerings beyond traditional transaction-related revenues. Also, the company launched its trading app in the U.K. this March and is contemplating offering cryptocurrency futures in the United States and Europe.
Robinhood has a market cap of $18.6 billion. So far this year, the company’s shares have soared 66.3%. The Zacks Consensus Estimate for ongoing-year earnings has been revised 1.8% upward to 57 cents in the past month.