Increased activity
TD Ameritrade Holding Corp. (NYSE:AMTD) reported that clients’ assets have grown to $524 billion, up 18% year-over-year. Average client trades per day increased 6% sequentially. Net new client assets grew 8%. Clients’ assets grew 17% at Charles Schwab, while E TRADE Financial Corporation (NASDAQ:ETFC) enjoyed a 14% rise in clients’ assets. Charles Schwab Corp (NYSE:SCHW) noticed that a modest rebound in client activity lifted trading revenue 7%.
What is causing this? First, it’s the market growth. As the market continues to make new highs, more people feel the need to profit from it. Market growth partly explains the growth in the clients’ assets. The next driver is the beginning of the shift from bonds to equities. The run for safety is mostly over and clients are willing to take risks. Due to the volatile nature of the market, equity trading involves more transactions, leading to healthy commission revenue.
Would this trend continue?
It takes time to regain confidence after such events as the recent crisis. The retail market is in the early stage of rebuilding this confidence. The shift from bonds to equities is likely to continue as people begin to prefer returns over safety. Next, the Federal Reserve would be ultimately unwinding its bond-buying program. This would lead to increased volatility in the market. The volatility brings more activity and leads to profits for brokers.
The development of trading platforms, as well as their availability across multiple platforms, would also contribute to the positive trend. Trading platforms are a lot more user-friendly than they were just five years ago. Everything is done to take the technical side off the investment process for the end user. The fact that clients can manage their money from tablets and smartphones, which they carry with themselves, would lead to increased confidence.
Which one should you choose?
Now that we’ve established that the macro trend is positive for brokerages, which one should you choose? These stocks have gone a long way up this year, pushing their valuations higher and higher. TD Ameritrade Holding Corp. (NYSE:AMTD) is trading at 20.52 forward P/E, and is the cheapest one according to this metric. Charles Schwab Corp (NYSE:SCHW) trades at 25.30 forward P/E, while E TRADE Financial Corporation (NASDAQ:ETFC) trades at 20.64 forward P/E.
Charles Schwab Corp (NYSE:SCHW) is the biggest company. It theoretically means that it is more difficult for Charles Schwab to show the same growth rates as E TRADE Financial Corporation (NASDAQ:ETFC), which is the smallest of the three, because it starts from a big base. There is little surprise that Charles Schwab has gained less this year than its peers. In addition, Charles Schwab Corp (NYSE:SCHW) provides banking services, as well as ETF offerings.
E*TRADE declared that it is closing its market-making business and took a $142 million goodwill impairment as a result of this action. In my opinion, this makes the company more focused. The market was pleased with the announcement and the stock rose 8% on the day of the report.
TD Ameritrade Holding Corp. (NYSE:AMTD) has set a bunch of internal records this quarter. The company posted record net revenue of $725 million, as well as record market fee-based revenue of $65 million. It also achieved record mobile trades and record derivatives trades. Moody’s has upgraded TD Ameritrade Holding Corp. (NYSE:AMTD) to “A3”. If the company can continue such a momentum, the shares would ultimately appreciate.
Bottom line
The biggest risk is the pace at which these stocks have appreciated. The big picture looks good for the business. Charles Schwab Corp (NYSE:SCHW) is less focused and most expensive, so I would not choose this one. TD Ameritrade Holding Corp. (NYSE:AMTD) and E TRADE Financial Corporation (NASDAQ:ETFC) look good. However, I would recommend waiting for a pullback, because it’s highly possible that the shares have gotten ahead of themselves.
Analysts’ mean target prices back this conclusion. They suggest 15% downside for Ameritrade, 10% downside for Charles Schwab, and 21% downside for E TRADE Financial Corporation (NASDAQ:ETFC). These targets are too much on the downside, but a significant pullback would make the brokers attractive.
The article Bet On These Brokerage Companies! originally appeared on Fool.com and is written by Vladimir Zernov.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends TD Ameritrade. The Motley Fool owns shares of TD Ameritrade. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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