Zacks.com releases the latest Zacks Industry Rank. Stocks featured in
last week’s analysis include Bear Stearns
(NYSE: BSC), Goldman Sachs (NYSE: GS), Lehman Brothers
(NYSE: LEH), Morgan Stanley (NYSE: MS) and Mosaic (NYSE:
MOS). To see the Zacks Industry
Rank and the trend in earnings estimates revisions for more than 200
industry groups, visit http://at.zacks.com/?id=3154.
Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior
Market Analyst for Zacks.com.
It was first-quarter earnings week for the major brokerage firms. Both Goldman
Sachs (NYSE: GS) and Lehman Brothers (NYSE: LEH) beat
earnings expectations. Morgan Stanley (NYSE: MS) also surpassed
estimates.
Revenues for all three firms declined because of losses in the credit
markets. Goldman Sachs recorded $2 billion of losses due to
mortgage-related and other fixed-income securities. (Britain's Telegraph
had predicted $3 billion in write downs, based on an unnamed source.)
Lehman Brothers wrote down $1.8 billion because of losses in the debt
markets. Morgan Stanley incurred $2.3 billion in writedowns.
Investment banking revenues were mixed. GS said revenues declined, while
LEH generated a 2% increase and MS enjoyed a 19% increase. (Half of
Morgan Stanley's investment banking revenues came from advisory fees.)
The tough market conditions and ongoing credit crunch has significantly
reduced the number of deals being closed this year. Fewer deals mean
lower revenues for investment banking firms.
Notably, investment management was a source of growth for GS and LEH.
The firms were able to pass through higher fees, resulting in higher
revenues despite basically no change in assets under management (AUM).
MS also realized higher fees, but the company incurred a loss because of
its real estate investments.
Overall, the numbers cleared substantially lowered hurdles. The numbers
were not very good, but they were not as bad as many feared, which is a
positive. There has been an erosion of trust and many had feared a very
bad scenario for Lehman, in particular. The mere fact that the numbers
were not horrible led to restoration of trust (at least temporarily),
which is significant.
The reason why trust is so important is that these firms are engaged in
the business of making deals and trading securities. Often these firms
use margin to buy leveraged securities. In other words, they are
borrowing money to buy securities that are comprised of other loans.
These companies also float money to get deals closed and engage in
various transactions where the other party needs to have reasonable
expectation of being paid. Fears that a financial firm may not be able
to fulfill its obligations can be fatal. It is such fear that led to the
collapse of Bear Stearns (NYSE: BSC).
Lehman has been aggressive in responding to rumors about its fiscal
health. The company also provided detailed information about its
liquidity at the top of its earnings release, an unusual step. I do not
follow LEH closely enough to directly comment on the firm's fiscal
stability, but LEH is clearly trying to preempt a fire while there is
just a little smoke. This is important, because in the financial
industry, perception can be reality.
It is too early to tell what the change in the consensus earnings
estimates will be for all three firms. I would not be surprised to see
some temporary upward revisions in the coming days, but I also think
this could be more an adjustment than an actual change in sentiment. The
financial sector as a whole continues to account for a disproportionate
share of negative revisions and I don't see this changing over the
short-term.
Moving on…
Full-year earnings estimates were recently raised on Mosaic
(NYSE: MOS) and other fertilizer companies. The positive revisions
extend a trend of increasingly higher profit projections and reflect
optimism among brokerage analysts that demand for fertilizer will remain
strong.
Investors may want to keep an eye on the spring weather, which can be
volatile. Any disruption in planting season could have an impact on many
agricultural stocks and commodity prices. It's not something that I'm
specifically worried about, but it does present a seasonal risk that
many new investors to the agricultural sector may not be considering.
The interactive Zacks Industry
Rank List allows you to see all of the companies, and their Zacks
Rank, within more than 200 industries. See the list at
http://at.zacks.com/?id=3208.
About Zacks Industry Rank and the Zacks Rank
Zacks Industry Rank is calculated by averaging the Zacks
Rank for all covered companies within a given industry. The Zacks
Rank is assigned to approximately 4400 stocks and ranges from #1 (“Strong
Buy”) to #5 (“Strong
Sell”). Both the Zacks Industry Rank and the
Zacks Rank are quantitative indicators designed to cover periods of 1-3
months.
Since 1988, the Zacks Rank has proven that "Earnings estimate revisions
are the most powerful force impacting stock prices." Since inception in
1988, #1 Rank stocks have generated an average annual return of +32%.
During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%,
while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system
has just as many Strong Sell recommendations (Rank #5) as Strong Buy
recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have
underperformed the S&P 500 by 129% annually (+5 % vs. +12%). Thus, the
Zacks Rank system allows investors to truly manage portfolio trading
effectively.
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