Stocks finished down today as investors digested both the start of earnings season and the chance of the President-elect’s new stimulus proposal getting enacted. Adding to the mix is speculation that we could see higher taxes due to increased government spending.
Since any new stimulus bill is still weeks away, I’d like to focus on the fourth-quarter earnings season as it could have a much more significant effect on stocks in the weeks ahead. And one industry I am focusing on is investment banking. Many banking stocks have recently seen upward revisions in their earnings estimates, which only adds to my bullishness for the industry. That’s why I am recommending investors take a look at Goldman Sachs Group, Inc. (GS), Moelis & Company (MC), and Evercore Inc. (EVR).
But before we get into those stocks, let’s take a look at the markets over the past week.
Stocks dropped Monday after last week’s record-setting rally. The S&P 500 fell 0.5%, while the Dow slipped 0.2%, giving back some of last week’s record-setting gains. The Nasdaq Composite index fell 1% as tech stocks were under pressure. The indexes bounced back on Tuesday as investors considered the chance of additional stimulus. Energy stocks led the charge as crude oil prices rose above $53 per barrel to a 10-month high.
The S&P 500 and Nasdaq gained again on Wednesday in the hope of additional stimulus. The Dow and Nasdaq hit new record intraday highs on Thursday before ending the day lower. Stocks are lower again today as the market considered the details of the President-elect’s new $1.9 trillion stimulus plan, but it is also most likely that the stimulus is already priced in the market.
As I mentioned earlier, I am focused on earnings season, and one of the biggest announcements today was JP Morgan’s (JPM) latest earnings report. While the stock finished down today, I liked what I saw from the bank, as it posted stronger-than-expected fourth-quarter earnings, and investment banking profits surged.
Investment banking is one industry I have kept an eye on over the past few months. Many banks were able to generate substantial revenue in initial public offerings (IPOs) last year to make up for lost merger and acquisition (M&A) activity. In fact, 2020 was a big year for IPOs. Three out of the ten largest tech IPOs in U.S. history took place last year. This was partly due to low-rate financing available for equity underwriting.
M&A activity should see a rebound this year, as companies position themselves for better economic activity due to the vaccine’s rollout. In addition, some investment banks are seeing an increase in earnings estimates leading to their fourth-quarter earnings releases. Increased earnings estimates are always a good sign for a stock. That’s why I am highlighting three investment banking stocks that I am bullish on.
Goldman Sachs Group, Inc. (GS)
GS is one of the most well-known investment banks globally and is the first choice for many junior bankers looking to start their careers. That prestige has been gained through its leading status in global investment banking. Its stock performed well last year, despite many of the headwinds the banking industry faced. It gained 17.5%, compared with an 8.7% loss for the SPDR S&P Bank ETF (KBE).
The only major business unit that was down for GS last year was mergers and acquisitions. This year, that segment is expected to see a strong rebound after seeing a 27% revenue decline in the third quarter last year. The company’s earnings estimates have been revised upward heading into its fourth-quarter earnings release. The company is reporting on Tuesday, January 19th, before the bell.
The stock is rated a “Strong Buy” in our POWR Ratings system. It holds a grade of “A” across the board in every POWR component, including its overall grade. GS is also the #3 ranked stock in the Investment Brokerage industry.
Moelis & Company (MC)
While not as well-known as GS, MC is a global independent investment bank that provides innovative, unconflicted strategic advice to a diverse client base. It serves clients such as corporations, governments, and financial sponsors. MC is another company that has seen its earnings estimates revised upwardly ahead of its earnings release on Wednesday, February 3rd.
The company has grown through its global expansion efforts and diverse business offerings across sectors and industries. Both sales and revenue were down over the past year, but analysts expect revenue to grow 14.9% and earnings to increase 16.4% next year. Mergers and acquisitions are forecasted to bounce back this year, and MC is expected to continue to generate revenue through M&A and restructuring activities over the long term.
The stock is rated a “Strong Buy” in our POWR Ratings system. Similar to GS, it holds “A” grades in every POWR component. It is also the #11 ranked stock in the Investment Brokerage industry.
Evercore Inc. (EVR)
EVR is an independent investment bank that derives the majority of its revenue from financial advisory, including merger, acquisition, and restructuring advisory. The company has benefited from a strong IPO market this year. While M&A activity was down last year, underwriting was up across the board as many companies needed to raise capital during the pandemic. EVR though, was a standout.
The company was part of 30 underwriting transactions in the most recent quarter and has served as a bookrunner or co-manager on 6 of the year’s largest IPOs. The company was named the top independent research franchise by Institutional Investor for seven consecutive straight years, including 2020. M&A activity is expected to rebound this year, and the company should see additional revenue by diversifying into other financial activities such as private placements and tax advisory.
EVR has seen its earnings estimates revise higher, heading towards its latest earnings report, set to be released on Wednesday, February 3rd. The stock is rated a “Strong Buy” in our POWR Ratings system. It holds a grade of “A” for Trade Grade, Buy & Hold Grade, Industry Rank, and a “B” for Peer Grade. It is also the #9 ranked stock in the Investment Brokerage industry.
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GS shares fell $1.00 (-0.33%) in after-hours trading Friday. Year-to-date, GS has gained 14.14%, versus a 0.49% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More…
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