Happy days are back


Happy days are here again for the brokerage industry. The only question is whether they will last.

After several painful years of cost-cutting, the industry has come back with a vengeance in 1991. Strong retail trading volume, a lot of new stock issues, the benefits of low interest rates and hopes for an improved economy have all played roles in this resurgence. Greatly improved balance sheets are the result of writing off problems tied to bridge loans and junk bonds. Cutting fixed costs, in the case of industry giant Merrill Lynch by a significant 6 percent, has further improved overall efficiency.

Thanks to all these varied factors, there's a new bull market in the stocks of the securities firms. The group has produced a whopping 50 percent total return this year, compared to 13 percent for the overall stock market.

The second half of the year isn't necessarily more of a sure thing, however. It's likely that quarterly earnings per share, even if strong, won't be able to equal the powerful first quarter of this year. Another concern is that the brokerage business traditionally tends to taper off in the second half of the year. It might also be possible that, after such a big run-up, the industry needs some time to catch its breath. And, of course, a lot depends on the underlying activity of the financial markets and economy which fuel its growth. Yet all of those caveats haven't dampened the enthusiasm of some industry watchers.

"The brokerage industry stocks still have more upside potential, especially in the declining interest rate environment that I expect," predicted Alison Deans, securities industry analyst with Smith Barney, Harris Upham & Co. "Declining interest rates boost activity in corporate refinancing, aid the stock market and make it more attractive for companies to go public."

Of course, all brokerage stocks are not alike. Deans currently recommends the stock of Bear Stearns Cos., which she considers an excellent company well-positioned to take full advantage of all aspects of its business. Another favorite is Morgan Stanley Group, which will be a big beneficiary of the upswing in the investment banking business. She recently added PaineWebber Group to her buy list because, while it's the least profitable firm in the industry, it is improving and attractively priced.

Some analysts are more cautious. "In my opinion, the brokerage industry stocks may have reached a peak that fully reflects all the good aspects of 1991," said Guy Moszkowski, securities industry analyst with Sanford Bernstein & Co. "The only way that they could outperform the first half of the year would be if there were substantial upward revisions in the Wall Street estimates of their 1991-1992 potential."

Moszkowski suggests only the stocks of two firms which own brokerage firms, namely American Express, parent of Shearson Lehman Brothers, and Primerica Corp., owner of Smith Barney. Both, in his opinion, are undervalued.

As far as choices for long-term growth, he likes Merrill Lynch because of its progress in cost-cutting, its position as a market leader, its stock and bond issuance and its good money-market unit. He's also fond of Morgan Stanley, the premier name in institutional trading and investment banking, and a firm adept at dealing with foreign markets.

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