It’s not often you hear the words "best" and "investment bank" juxtaposed, these days. Next to airlines and ... airlines, it’s one of the most unloved industries by the mainstream. But, just like any stereotyped business, there are exceptions to the rule. One investment bank is far ahead the rest, whether it's in the areas of growth, responsibility, or management. While most of the attention goes to the big G, this bank is the one that really deserves your attention, and maybe even your capital.
Does anyone notice how the market seems to be almost constantly in earnings season? It's like summer in Florida -- it just doesn’t want to go away. I thought we just wrapped up second quarter earnings season a couple weeks ago, and now there are some Q3 numbers trickling in. It just never ends. (Sigh.)
One of the first reports for this iteration of earnings season has had a negative impact, but if you read between the lines, as you often must do in a quarterly report, there lies a healthy, profitable company. Jefferies (NYSE: JEF ) has been my favorite investment bank pick for some time now, even when most analysts are touting Goldman Sachs (NYSE: GS ) as the undervalued giant, ready to make its return to glory. Besides the ethical issues swarming the company like bills to my mailbox, I don’t have much of a problem with Goldman; but why choose good when you can have great?
Good for you, Jeff
Jefferies has had a bit of a roller-coaster year in terms of stock price. From last September to now, the stock has barely moved a buck, but with large fluctuations in between. Part of that stagnation is the undesirable nature of investment banks right now. Investors are scared of them, and don't know what they are really up to. Unfortunately, these businesses earned this distrust, and now they have to cope, even if they are one of the better shops out there.
Jefferies has shown steadily rising revenue over the last three years, and has built one of the strongest balance sheets of any investment bank. In the meantime, the company has been buying back shares, with 1.7 million shares purchased in the last quarter alone. The board has authorized nearly 12 million more shares to be repurchased over time.
Though the quarter showed EPS growth and top line growth, as well, it was mitigated by the fact that most of the gains were buoyed by the company's $400 million stake in Knight Capital (NYSE: KCG ) . Jefferies was one of the main players in the bailout of the troubled trading firm.
What’s really nice about Jefferies' current position is its liquidity. I'm not a fan of trading firms and complicated financial instruments, but Jefferies' trading positions stand at 97% Level 1 or Level 2 liquidity ratings -- the most liquid classes.
All in all, CEO Rich Handler considers this latest nine-month period to be the absolute best in the company's 50-year history.
Jefferies has a forward P/E of 10.9, compared to Goldman's 9.37. It trades at richer valuations than its friends, especially the mega banks -- and for good reason. The company has plenty of cash on the balance sheet, and a very manageable debt load. With the Fed’s recent decisions, the fixed income business will only benefit from the company's expanding international client roster, as well as domestic.
In my opinion, Jefferies has a more understandable, predictable, and safer business model than any of its investment banking brethren. This is no Bank of America (NYSE: BAC ) . Sure, you can pick up BOA for fifty cents on the dollar, but that assumes the company's assets can be sold at face value or more. Bank of America, like the other "Too Big to Fail" banks, has so much junk going on in its bloated business, that it's absolute hubris for any analyst to believe they understand the ins and outs of the entire business. It’s simply too much to break down into a buy or sell rating.
Jefferies, on the other hand, is the exact opposite. It has a concise revenue model that the average investor can look at, model, and profit from. And to top it off, CEO Rich Handler is a competent manager who is risk-averse, and all around non-Blankfein-ish, Dimon-y, or Moynihan-ian.
In its deeply rooted position in the U.S. financial system, there is considerable risk if the economy takes a turn for the worse -- but I find those risks to be short term and irrelevant to the fundamental strength of the company.
For exposure to the investment banking world, without most of the investment banking hootenannies, I find Jefferies to be the number one pick for risk-averse, value-oriented investors.
If, though, by mentioning Bank of America and its ever-complicated strategies, your ears perked up, check out this premium report, which outlines the banking giant's opportunities and hurdles ahead.