BlackRock, Inc. (BLK), Charles Schwab Corp (SCHW): Is it Time to Sell Brokerages in Favor of Fund Managers?

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An investor who bought one of the many discount brokerage stocks earlier this year would have seen handsome gains. Indeed, so far, Charles Schwab Corp (NYSE:SCHW) and E TRADE Financial Corporation (NASDAQ:ETFC) are up 55% and 53%, respectively, beating the wider market by 35%. However, I believe that now it could be time to book some gains.

You see, after these recent rallies, these brokerages are looking rather overbought and there is growing trend among retail investors to buy into funds and not individual stocks. Of course, Charles Schwab Corp (NYSE:SCHW) and E*TRADE will benefit as investors buy into funds and then benefit when investors come to sell these finds when the market eventually crashes. On the other hand, it might be better to look to the fund managers themselves, such as BlackRock, Inc. (NYSE:BLK) and Invesco Ltd. (NYSE:IVZ) who have seen smaller gains so far this year and still offer some value.

Indeed, the fund managers have a better long-term thesis for investment as they will collect fees from their funds not matter what, while a drop off in trading could significantly affect the retail brokerages.

There is a valuation gap

Surprisingly, despite the record fund inflows that have been occurring during the past few weeks, there is still a valuation gap between the fund managers and brokers.

Approx. Price P/E Forward P/E
BlackRock $285.00 18.5 17.8
Invesco $33.10 21.2 15.8
Charles Schwab $22.36 33.4 29.8
E*TRADE $13.70 -27.4 27.4

That said, earnings predictions for this year favor the brokers, especially E TRADE Financial Corporation (NASDAQ:ETFC), which is predicted to pull itself from a loss into a profit, although after taking into account lofty valuations, fund manager Invesco appears to be more appealing:

2012 EPS 2013E Growth 2014E Growth PEG
BlackRock $15.40 $16.00 3.90% $17.10 6.88% 4.5
Invesco $1.56 $2.10 34.62% $2.30 9.52% 0.6
Charles Schwab $0.67 $0.75 11.94% $0.89 18.67% 2.3
E*TRADE -$0.50 $0.50 - $0.60 20.00% 0.0

It’s not just the valuations

BlackRock, Inc. (BLK)Elsewhere, it is not just low valuations that make the fund managers look attractive, Invesco and BlackRock, Inc. (NYSE:BLK) both offer higher dividend payouts than those of the brokers. Invesco Ltd. (NYSE:IVZ), for example, offers investors a 2.7% yield, BlackRock offers a 2.5% yield, meanwhile, Charles Schwab Corp (NYSE:SCHW) offers a 1.1% payout and E*TRADE offers nothing.

Credit: BlackRock, Inc. (NYSE:BLK)

Having said all of that, the outlook for both sectors remains highly dependent on both the economy and Federal Reserve actions, as a rise in interest rates, fall in asset purchases, or deterioration in the economy could quickly send the market into reverse and the fortunes of these asset management companies could change.

Who performs the best?

The only way of telling how these firms will react in uncertain market conditions it to look at the historic performance over a period of uncertainty.

The period between January 2011 and December 2012 was probably one of the most uncertain in recent times as central bank policy remained unclear, debt ceiling and sequestration battles raged, and Europe teetered on the brink of collapse.

So, how did these companies perform?

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