The stock market has been relatively choppy over the last 12 months. However, the main upward-trending movement has prevailed amidst the storm, which in general, tends to be a good thing for the market. This is because both long-term and short-term investors can benefit by employing different investing strategies.
For long-term investors, if the upward trending movement is maintained, then they are likely to hold on to their stocks longer while adding to their positions when pullbacks occur. On the other hand, short-term investors have capitalized on the short-term pullbacks and rebounds in the market by buying and selling at the end of every cycle.
This intensified activity in the market works well for stockbrokers because alongside attracting new investors, the frequency of trading also helps brokers to make more money from trading fees and commissions. This alongside other factors have played a crucial role in the steady rally witnessed in the stock brokerage market, with many players gaining more than 50% over the last 12 months.
Among the top performing stock brokerage companies in the market is Interactive Brokers Group Inc. (IBKR, Financial), which has rallied 116% since April last year while E*TRADE Financial Corp (ETFC, Financial) has gained 71% over the same period.
On the other hand, popular online trading broker TD Ameritrade Holding Corp (AMTD, Financial) and Charles Schwab Corp (SCHW, Financial), which according to top brokerage reviews is popular with retirement investors have gained 56% and 40% respectively, thereby wrapping up what has been an excellent period for stock brokers.
Generally, after such a rally, some investors might conclude that it may not be the best time to invest in the stock brokerage market. However, some of these stocks are still trading at an impressive price to earnings multiples compared to their recent averages.
For instance, E*TRADE appears to be one of the most attractive right now, with a P/E ratio of about 25x, which is significantly below those of its rivals and its average of 28x. Charles Schwab’s P/E ratio has also dropped significantly in the last few trading sessions from its YTD average of about 34x to the current level of about 30x.
TD Ameritrade appears to be the odd one out, though, not by much. Its current P/E of 35x is a slight increment from its YTD average of about 34x. Interactive Brokers has gained 116% over the last 12 months and that was bound to result in a significantly higher P/E ratio compared to its rivals. However, its current P/E ratio of 54x is a significant drop from YTD average of about 62x.
Therefore, we could say that while generally some of these valuation multiples might appear to be too pricey to pay for stocks that recently hit new all-time highs, the recent declines might as well present an opportunity to buy. Furthermore, when you look at their current earnings projections through 2019, the growth story just becomes more interesting.
Both E*TRADE and TD Ameritrade are expected to double their current annual earnings per share at the end of the year while Charles Schwab and Interactive brokers should also come close, according to analyst estimates as demonstrated on the chart below.
E*TRADE is expected to do even better in 2019, by nearly tripling its 2018 EPS, while TD Ameritrade, Charles Schwab, and Interactive Brokers should experience a slight slowdown in growth rate. Now, unless these stocks miss analysts estimates by a significant margin, their performances over the next 18 months should be good enough for investors to continue holding on or adding to their current investments in the stock brokerage market.
Their top lines are also expected to improve in the current year with Charles Schwab having a projected revenue of $10 billion in 2018, which would be a significant increment from last year’s top line of $8.6 billion. TD Ameritrade is also expected to post a massive rise in revenue reaching $5.1 billion from last year’s $3.6 billion. Both E*TRADE and Interactive Brokers are expected to have a slower period adding about $0.3 billion and $0.2 billion to last year’s top lines of $2.37 billion and $1.7 billion respectively.
In summary, the expectations are high for stock brokerage companies and some appear well placed to live up to them. And while their P/E ratios have risen significantly following their 12-month rallies, most have recently dropped creating another window for investors to pounce.
Disclosure: I have no position in stocks mentioned in this article.
