Brokerages on the rebound

Andrew Leckey

February 04, 1992|By Andrew Leckey | Andrew Leckey,Tribune Media Services

The brokerage industry is on a roll.

Despite the lingering recession, it was one of the best-performing stock groups in 1991. Many brokerage stocks doubled or tripled in value as investors rediscovered the market and balance sheets went from red to black.

In this cyclical business, 1990 was the worst year since 1974. Yet 1991 turned out to be the best year since 1983, boasting profits of $5 billion.

Consider industry giant Merrill Lynch, whose return on equity was a mere 5.8 percent in 1990 but an estimated 19 percent for 1991, thanks to record profits of $696 million.

It makes you wonder how investment brokers ever keep an even disposition.

"The brokerage industry is a leading indicator of the economy and, based on how it has been performing, I expect improvement in the economy by midyear," said Jerome Fischer, brokerage industry analyst for Value Line Inc. "Buying equities has picked up tremendously and will be a trend for 1992."

The industry is lean and mean, with the number of employees cut from 250,000 to 200,000 in the past year. Low interest rates continue to move attention toward stocks.

"I expect overall brokerage profits to be about where they were in 1991, even though revenues may go up 5 or 6 percent," predicted Perrin Long, research director with First of Michigan. "That's because of costs of adding new sales and support people."

There's a trend among retail brokers toward prepackaged products such as mutual funds instead of traditional stocks and bonds.

At the same time, investors with high net worth are being offered "wrap" fee accounts, offering a greater number of portfolio management services for one fee.

"The one business in the industry that should begin to improve with low interest rates is mergers and acquisitions, which has been slowed by unavailability of bank or insurance company financing," said Scott Offen, portfolio manager of the Fidelity Select Brokerage and Investment Fund, whose profits were up 82 percent last year. "But I think that the outlook in that area is a bit better than it was, thanks in part to greater strength of the 'junk' bond market."

The Salomon Brothers scandal hasn't left much impact on the brokerage industry, other than on Salomon itself.

"I was concerned the Salomon situation would lead to a widespread scandal involving the government bond bidding process, but it hasn't turned out that way," observed John Keefe, brokerage industry analyst with Lipper Analytical Services.

Primerica Corp., parent company of Smith Barney, Harris Upham & Co., is Offen's favorite brokerage stock because the company has enacted tight fiscal control, positioned itself well in the capital markets and hired terrific investment talent. It also bought some offices of defunct Drexel Burnham Lambert cheaply.

Bear Stearns Cos. is recommended by Fischer because it is a well-managed company that continues to hedge its risks and have its profitable divisions grow. Industry giant Merrill Lynch has cut costs significantly and its investment banking business and is also expected to do well.

Meanwhile, Morgan Stanley Group is a stock pick of Long's. Among mutual fund companies, Offen recommends the stocks of T. Rowe Price, Franklin Resources and Dreyfus Corp.

"Nobody likes to be left at the post, so to say, so when the stock market goes up and it's on the evening news, people jump right in," said Long. "Although it is a cyclical industry, the greater the demand, the more the prices go up."

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