Financial stocks have endured volatility in recent months, with the collapse of a few regional banks causing concern among investors. These problems appear to be limited and this has created a buying opportunity in financial companies without deposit-flight issues caught up in the selling over the past two months.
There are some good investment options in the capital markets industry. When looking at these stocks, I seek out companies with robust businesses and smart management teams in place. The two specific stocks that I like are Morgan Stanley (MS 0.29%) and Interactive Brokers (IBKR -1.01%).
1. Morgan Stanley
Morgan Stanley provides financial services across a variety of businesses. Its most significant segment is institutional securities, where it advises companies on going public and issuing or restructuring debt in return for advisory fees. It also manages clients' wealth, earns fees on its assets under management (AUM), and owns the E*Trade trading platform, where it makes commissions and fees.
Morgan Stanley has dealt with a slowdown in investment banking for the past year. Fewer companies are going public through initial public offerings (IPOs), resulting in a drastic decline in equity underwriting. There have also been fewer mergers and acquisitions, as well as debt issuances. As a result, the company's investment banking revenue declined 24% in the first quarter from the previous year.
What has helped the investment specialist is the wealth management arm of the business. This segment's quarterly revenue grew 11% from last year. Its net interest income led the way, increasing by 40% to nearly $2.2 billion. Overall, net revenue fell 11% for the period. Thanks to its diversified revenue streams, Morgan Stanley has done a solid job navigating an uncertain market environment. It also hasn't faced deposit-flight issues like rival Charles Schwab.
Because of selling in recent months, the stock trades at a one-year forward price-to-earnings ratio (P/E) of about 13. Although investment banks warrant a relatively low valuation because of their cyclical nature, Morgan Stanley has diversified its business to be more resilient across economic cycles, making it a solid buy today.
2. Interactive Brokers
Interactive Brokers offers an electronic trading platform for both retail and institutional investors. What makes it stand out is its impressive growth. Over the past five years, its customer accounts have increased 332%, or 34% annually.
Its secret to success is its automated trading platform that caters to tech-savvy investors. The company is so obsessed with automating its trading platform that most of its senior managers have a background in software engineering. By automating as many functions as possible, Interactive Brokers has become a low-cost provider of choice. Not only that, but its margins are spectacular. Last year its pretax margin was 67%.
The company has done a solid job of adding customers and client funds at a time when others are struggling to maintain them. Interactive Brokers pays some of the highest rates on clients' uninvested cash, which will increase from 4.33% to 4.58% after the Federal Reserve's most recent interest rate increase. Because of these attractive interest rates, client cash balances grew 11% in the first quarter from Q4.
Another project the fintech is working on is an auction-based model for options trades. This model contrasts with payment for order flow, where brokers sell client orders to a single market maker who executes trades. The auction-based model is in line with what regulators would like to see, and Interactive Brokers expects this could be another selling point to attract more customers to its platform.
Interactive Brokers has done a stellar job of automating its platform and offering customers low commissions and high interest rates while maintaining spectacular margins, making this a solid stock you can confidently add to your portfolio today.
