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3 Brokerage Stocks Set to Soar Even in the Zero-Commission Era

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Nikita Kataruka
·7 min read
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Year 2020 has been tough for all businesses, big and small. Almost all industries have had to bear the brunt of the pandemic. However, there have been a few industries that surprisingly performed better than expectations despite the pandemic-induced economic slowdown.

One such industry is the brokerage industry, which, in fact, benefitted from the uncertainty caused by the coronavirus outbreak. The uncertainty, which gave rise to significant market volatility, aided trading activities in the United States as well as globally.

Driven by heightened volatility, client activity increased amid the pandemic. Thus, brokerage firms benefitted from rising trading volumes.

Moreover, amid the pandemic, in order to remain competitive, there has been a lot of consolidation within the brokerage industry, which might continue in the near term.

So far this year, the Zacks Investment Brokerage industry has gained 19.2%, outperforming the 16.7% rally for the S&P 500 Index. Moreover, the performance has been better than that of the Zacks Finance sector (to which the brokerage industry belongs), which declined 5.1%.

In addition to benefitting from the above-mentioned factors, industry players got support from the zero-commission trading practice that was introduced by major online brokerages last year.

Increasing competition from FinTech startups like Robinhood Markets Inc., M1 Finance, WeBull and TradeZero, which already offered zero-cost stock trading services, was weakening online brokerage firms’ foothold. Thus, in order to garner market share, online brokerage firms introduced commission-free trading, which came into effect in October 2019.

Initially, following this announcement, shares of some of the industry players tanked as investors seemed more concerned about lost revenues from trading activities, which form a significant portion of the companies’ total revenues. Moreover, with lower interest rates already putting pressure on net interest margins, investors became apprehensive.

Nevertheless, since the introduction of commission-free trading, almost all online brokers have been able to attract new clients. This helped them generate fees from providing other services. Additionally, during the lockdown, many new retail investors entered the markets as staying at home and government stimulus packages gave them surplus time as well as cash to begin with amateur stock market trading. This further supported firms’ trading revenues.

The uptrend is expected to continue in 2021. While there have been rising hopes regarding an economic recovery, the upcoming news of a stronger version of the virus is expected to yet again result in market uncertainty next year.

While this is bad news for most industries, it will likely be a positive for the brokerage industry. Also, the new stimulus package is expected to carry the momentum forward.

3 Brokerage Firms to Keep an Eye on in 2021

Charles Schwab SCHW: This San Francisco, CA-based discount brokerage firm currently sports a Zacks Rank #1 (Strong Buy). So far this year, its shares have gained 8.6%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Schwab, which has a market capitalization of more than $97 billion, has been undertaking several initiatives to build client base and improve trading income. Notably, its total client assets witnessed a compound annual growth rate (CAGR) of 13.3% over the last four years (ended 2019), with the uptrend continuing in the first nine months of 2020. In November 2020, Schwab opened 430,000 new brokerage accounts, substantially up from 127,000 in November 2019. Moreover, its active brokerage accounts totaled 29.2 million as of Nov 30, 2020, surging 138% year over year.

Further, the company’s recent acquisition of TD Ameritrade Holding for $22 billion has led to the creation of a behemoth in the online brokerage space. Along with this, Schwab has concluded many other strategic deals over the past years, which are expected to strengthen its position in the brokerage industry and help diversify revenues.

Schwab’s earnings are projected to grow 4.2% in 2021. Moreover, analysts seem to be optimistic regarding the company’s earnings growth prospects. Thus, the Zacks Consensus Estimate for its 2021 earnings has been revised upward by 27.5% over the past 60 days.

Raymond James Financial RJF: Based in St. Petersburg, FL, Raymond James has a market cap of more than $12 billion. Its earnings are projected to grow 8.2% in fiscal 2021. Moreover, the Zacks Consensus Estimate for its fiscal 2021 earnings has been revised upward by 10.2% over the past 60 days.

Supported by a solid liquidity position, the company continues to engage in inorganic growth efforts. Earlier this month, as part of its efforts to expand coverage within Consumer & Retail Investment Banking, Raymond James agreed to acquire boutique investment bank, Financo. Also, it signed a deal to buy NWPS Holdings, Inc., which specializes in retirement plan administration, consulting, actuarial and administration services.

Furthermore, Raymond James expanded into Europe and Canada with the help of opportunistic acquisitions. In fact, management looks forward to actively grow through acquisitions with an aim to further strengthen its Private Client Group and Asset Management segments.

Moreover, while in mid-March 2020, the company suspended share buybacks with an aim to conserve liquidity amid the pandemic; it resumed the same in the fiscal fourth quarter. Earlier this month, it announced a new buyback plan, under which it authorized the repurchase of up to $750 million worth of shares. Thus, the company is expected to continue to enhance shareholder value through efficient capital deployment activities.

So far this year, shares of the company have gained 4.8%. It currently carries a Zacks Rank #2 (Buy).

LPL Financial Holdings LPLA: The company currently has a Zacks Rank #3 (Hold) and its shares have rallied 12.3% so far this year. Based in Boston, MA, and incorporated in Delaware, LPL Financial has a market cap of $8.2 billion. Being a clearing broker-dealer and an investment advisory firm, it acts as an agent for its advisors on behalf of their clients by providing access to a broad array of financial products and services.

LPL Financial continues to benefit from its efforts to increase client base. The company’s advisory revenues (which constitute more than 39% of its total net revenues) witnessed a six-year (2014-2019) CAGR of 8.2%, with the uptrend continuing in the first nine months of 2020.

Notably, as of Nov 30, 2020, the company had total brokerage and advisory assets of $873.3 billion, up 16.8% year over year. Of the total assets, brokerage assets were $431.3 billion and advisory assets totaled $442 billion.

LPL Financial continues to grow through inorganic growth efforts. The acquisition of Allen & Company in 2019 is expected to further support advisory revenues. Moreover, its deal to acquire Waddell & Reed's wealth management business along with the acquisitions of Blaze Portfolio, the assets of E.K. Riley Investments, LLC, and Lucia Securities are expected to continue to support financials, going forward.

In 2021, LPL Financial’s earnings are projected to grow 4%. Moreover, the Zacks Consensus Estimate for its 2021 earnings has been revised upward by 2.2% over the past 60 days.

Zacks Top 10 Stocks for 2021

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?

These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold.

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The Charles Schwab Corporation (SCHW) : Free Stock Analysis Report
Raymond James Financial, Inc. (RJF) : Free Stock Analysis Report
LPL Financial Holdings Inc. (LPLA) : Free Stock Analysis Report
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