Have Online Brokers Been Overly Punished Around Brexit and Rates Being Lower For Longer?

June 28, 2016 by Jon C. Ogg

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Many investors have been complaining for years that it is just too hard to make money off of their investment money. The same has become equally true for the online brokerage stocks. It is no secret that the banks and financial stocks need higher interest rates to be able to make margins on their deposits. But what has been seen in the online brokerage stocks almost feels ludicrous.

These companies have seen a minor share price recovery on Tuesday, but the reality is that these are way down from last week’s highs and versus the highs from the end of May. Just don’t wait for an instant snap-back rally to recover the losses seen in recent days — it might take a while.

What investors need to consider is that all of those calls for higher interest rates have now died. Federal Reserve presidents who come out talking up higher interest rates will simply be laughed off a stage if that is the key message in their upcoming speeches. The U.S. Labor Department has seen a serious normalizing (or slowing) of that endless job growth. U.S. economic data look weak.

Now investors have to consider that the Brexit news just takes the cake. This strengthened the U.S. Dollar, making exports that much more challenging. Brexit-related weakness in Britain and in Europe could be months before a clear resolution and path is known, if not longer.

24/7 Wall St. has looked through the carnage in the online brokerage sector and added in relevant data. Income figures and individual valuation metrics were taken from Thomson Reuters data.

E*TRADE Financial Corp. (NASDAQ: ETFC) was last seen down 13.5% in a week and down just over 20% in the last month. E*TRADE’s $1.43 billion in revenues in 2015 was dominated by $1.215 billion in interest  income, and $424 million in commissions. Those and other revenues add up to more than the total revenues because of operating interest expenses and losses on other securities.

E*TRADE was last seen up 2% at $22.27 late on Tuesday, and it is valued at 12.5 times expected 2017 earnings. Its market cap is just over $6 billion and its 52-week range is $19.61 to $30.98.

The Charles Schwab Corp. (NYSE: SCHW) was last seen down 16% in the last week and was also down over 20% in the last month. This price action is roughly $29.50 pre-Brexit down to $24.50. Schwab’s $6.5 billion in revenues in 2015 was dominated as follows: $2.65 billion from asset management and fees, $2.657 billion in interest income and just $866 million in trading revenue.

Schwab shares were up 2% at $24.55 late on Tuesday and it is valued at 16 times expected 2016 earnings per share. Schwab is the king of the sector as its market cap is over $32 billion and its 52-week range is $21.51 to $35.72.

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TD Ameritrade Holding Corporation (NASDAQ: AMTD) was last seen down 13% from last Thursday alone, and it is down right at 17% from the end of May. TD Ameritrade’s revenues of $3.2 billion in 2015 were broken down as $622 million in net interest revenues and $1.4 billion in commissions and clearing fees. It also listed some $839 million in money market deposit account fees.

TD Ameritrade was up almost 2% at $27.19 late on Tuesday, and it is valued at 15.6 times expected 2017 earnings. TD Ameritrade is valued at about $14.4 billion and its 52-week range is $24.88 to $38.72.

The investing public has been waiting for years for these online brokerage firms to get a view of higher interest rates. Now they will have continued waiting for a future where they can make money on their deposits and brokerage account holders’ cash holdings.

A figure that has been used by TD Ameritrade is that a mere 1% rise in interest rates might increase its earnings per share power by as much as one-third. E*TRADE and Schwab might be less sensitive to rates, but the reality is that investors just won’t really know until they see what really happens with each company.

The move in recent days is to just price in another round of disappointing earnings. Make that rounds of disappointing earnings. These stocks trade at premiums to the banks and major brokerages, perhaps because they are less deemed to be less dependent upon internal trading and upon loan and underwriting fees. That being said, these stocks have been battered back down to near-market multiples.

Moves of this magnitude almost always feel excessive. Most of the time they are overdone, but that doesn’t mean they bounce back immediately. The problem of putting on a value investing hat is that cheap stocks are almost always cheap for a reason — and being cheap won’t keep a stock (or sector) from getting cheaper and cheaper.