The Fed's decision to continue its monthly bond-purchasing program could hurt the stock performance of some broker-dealers — including LPL and Raymond James — in the short run, one stock analyst said.
In a report released Thursday for broker-dealers and asset managers, William Katz, an analyst with Citigroup Global Markets Inc., outlined the implications of the Federal Reserve's decision Wednesday to put off any “tapering” of its bond buying program.
“We expect broker-dealers to lag and/or consolidate in the short term given embedded rate leverage and recent underperformance,” he wrote. “The key question is whether the pushback of tapering is temporary in nature or reflective of a more sustained delay that would materially impact timing to reach normalized earnings.”
Long-term interest rates shot up in June, causing some on Wall Street to regard interest-rate-sensitive financial services companies favorably. Broker-dealers and custodians of registered investment advisers see gains in net profit when rates raise; the spreads on margin lending increase, and so does the profit from client cash held in money market funds.
Broker-dealers could lag in the short term due to the Fed's decision not to taper, but Mr. Katz noted he was keeping his perspective on the long term. “The delay in tapering and the pullback in rate expectations weakens the short-term case for rate sensitive names but does not take away from upside potential with respect to normalized earnings power,” he wrote.
Mr. Katz wrote that LPL Financial Holdings Inc. (LPLA) and Raymond James Financial Inc. (RJF) as likely defensive in the short term due to, among other reasons, their underperformance relative to TD Ameritrade Holding Corp. (AMTD) and the Charles Schwab Corp. (SCHW)
Mr. Katz prefers LPL Financial over Raymond James at the moment in part due to less risk around consensus expectations, according to the note. “That said, there is no change to our positive long-term thesis on broker-dealers reflecting bottoming earnings per share expectations; improving retail re-engagement and higher net interest margin,” Mr. Katz wrote.
He rates LPLA a “buy” and has a “neutral” rating for RJF.