Investment banking has been having tough times of late for a variety of reasons. This ranges from a tougher regulatory environment to a lack of volatility in financial markets. This has resulted in poor performance from several big names. At the same time, boutique firms have made their presence felt and have outperformed their better-known peers.
Tough Times at the Top
The world’s top 10 investment banking companies suffered a 5% decline in revenues during the first half of the year. Total revenue came in at $82.3 billion compared with $86.8 billion in the year-ago period. This was disclosed in a report released late last month by Coalition, a U.K. analytics firm.
The Coalition Index relates to the performance of the 10 biggest global investment banks, including the likes of The Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE:MS).
The decline occurred due to weak fixed income, currencies and commodities (‘FICC’) revenues. FICC, which has become the major revenue source for banks amid the low interest-rate environment, fell 13% year over year to $39.6 billion in the first half of 2014.
Boutique Banks Prosper
A boutique investment bank is a smaller operation which employs around two to 40 people. These banks offer the same services as their larger peers. However, under normal circumstances, they are involved with deals below $500 million.
The ability of global investment banks to leverage their balance sheets has become severely restricted. They are now offering smart investment banking along with commercial banking. On the other hand, boutique operators have become more prominent as the power of their larger peers wane.
Boutique investment banks are being favored by companies because they offer customized and independent advice. Companies are giving more and more importance to such advice. Further, advisory and financing services have been separated. Even as larger banks continue with financial operations, companies prefer to have smaller players in an advisory role. These boutique operators have gained clout because of the quality of the advice that they offer.
Moelis & Company (NYSE:MC) is a good example of players which have gained from this trend. Company CEO Ken Moelis took the company public earlier this year without relinquishing any control, and the company’s stock has gained nearly 35% to date. Of course, the company has been in the news recently for its most famous employee, Eric Cantor, formerly House Majority Leader.
Our Choices
Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.
Moelis & Company is a global independent investment bank. The company provides innovative strategic advice and solutions to a diverse client base, including corporations, governments and financial sponsors. It advises clients in the areas of mergers and acquisitions, recapitalizations and restructurings, and other corporate finance matters. Moelis & Company is based in New York.
Moelis & Company holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 88.7%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 20.27.
Stifel Financial Corp. (NYSE:SF) is a holding company for Stifel Nicolaus & Company, Inc. Stifel Nicolaus is an investment banking company that provides all retail services and institutional brokerage services. The company has three segments through which it conducts its operations: Global Wealth Management, Institutional Group and Other.
The company currently holds a Zacks Rank #2 (Buy) and has expected earnings growth of 9.6%. It has a P/E (F1) of 17.97x.
Evercore Partners Inc. (NYSE:EVR) is a leading investment banking boutique providing advisory services to prominent multinational corporations on significant mergers, acquisitions, divestitures, restructurings and other strategic corporate transactions. Evercore also has a successful investment management business through which they also manage private equity and venture capital funds for sophisticated institutional investors.
Apart from a Zacks Rank #2 (Buy), Evercore Partners has expected earnings growth of 11.8%. It has a P/E (F1) of 19.91x.
As larger firms deal with a challenging business environment, small and agile players are delivering better performance. They have also gained from the flurry of deals which have dominated news from the Street this year. Given prevailing market conditions, adding these stocks to your portfolio would be a prudent choice.