3 Bad News Brokers for Investors to Avoid: MER, ETFC, KBW
In the days before exchange-traded funds, one of the main ways that traders traded “the market” was through buying and selling brokerage stocks. That was true when markets were rising and may be no less true, to the downside, when markets are falling.
It’s perfectly commonsensical. After all, what industry group benefits more from a rising stock market than the brokerage companies that make all those stock transactions possible?
Of course, there is a flip side to this. When markets are falling and the loathing of stocks is rising in the hearts of investors and traders everywhere, that’s when times get tough for brokerage companies. Brokers are laid off, support staff are liquidated, and the shares of these stocks are often subject to deep pullbacks as the market works to reprice the value of companies that are in the business of helping people buy and sell stocks just as that business is going south.
For the time being, south is directly where the brokerage business appears to be heading–at least for the three “bad news” brokerage companies in today’s discussion. All three of these brokerage
companies: Merrill Lynch, E-Trade Financial and KBW, Inc. have not only been providing investors with the sort of negative headlines that are a major turn-off. But also these stocks feature the sort of low, Long Term PowerRatings that put them in a class of stocks that investors should be wary of investing in.
How wary? The lowest PowerRating stocks, based on our research into thousands and thousands of stock trades between 1995 and 2007, have not only failed to keep pace with the average stock, but also have actually produced negative returns, on average, after one year. In a market where investors are increasingly just looking for stocks that go up instead of down, a stock that has a historical tendency to provide negative returns in a year’s time is certainly a stock that investors should run from, rather than walk.
We found that stocks with Long Term PowerRatings of 1–our lowest rating–tended to lose an average of approximately 5.08% in a year’s time. Compare this to the average stock, which tended to gain between 12-13% after one year.
Low PowerRatings stocks were also among the least reliable stocks that investors can invest in. Stocks with Long Term PowerRatings of 3 or less have been higher one year later less than 45% of the time. Again, even the average stock is superior by comparison, being higher one year later between 53-68% of the time.
Let’s take a look at these “bad news” brokerages–and see if we can keep the bad news from these brokerages limited to the news headlines and away from your investment portfolio!
Merrill Lynch saw its shares pullback sharply in the first week of March after announcing that it was scraping its subprime mortgage lending division, as reported in BusinessWeek. The stock has been steadily trending lower from the high $50s in January to the mid $40s most recently.
Merrill Lynch [MER@MER]
E-Trade Financial’s CEO Donald Layton found himself fighting off rumors that the company was looking to sell or break up the struggling online discount brokerage firm according to a story in the International Herald Tribune. Trading in an approximate range between $3 and $5, E-Trade has been a stock to avoid for months. The company’s Long Term PowerRating of 2 has been in effect since the beginning of the year.
E-Trade Financial [ETFC@ETFC]
Whether rallying above $29 or trading, as it has most recently, below $20, KBW, Inc. has remained a stock that investors should avoid over the past few months. KBW has not produced the same above-the-fold headlines as Merrill Lynch and E-Trade, but if the stock’s PowerRating of 1 has anything to say about it, that fact may only be a matter of time.
KBW, Inc. [KBW@KBW]
Successful investing is about knowing what stocks to avoid. But it is also about knowing what stocks to buy. Our Long Term PowerRatings will give you an edge in picking the sort of companies with strong financials and earnings growth that is better than that of the average stock. Try a free, 14-day trial to PowerRatings.net to get access to our PowerRatings charts, daily upgrades and downgrades directories, lists of top technology stocks as well as our market commentary and analysis. Click here to start your free trial–or call us at 888-484-8220.
David Penn is Senior Editor at PowerRatings.net.