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

Page 1 of 2

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?

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 44 percentage points in 21 months Learn how!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!