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You've undoubtedly heard the old saying "If you can't beat 'em, join 'em." Despite the uproar over the Occupy Wall Street protests, many investors have decided that if Wall Street's brokers and banks are too big to fail, it makes more sense to buy bank shares than to fight against the collective efforts of the financial industry and the Federal Reserve.
But if you don't want to give up without a fight, there's a secret way you can tap into the Wall Street profit machine -- and three stocks you can use to get there. I'll reveal them below, but first, let's take a look at the big mistake that even expert investors have made.
Getting in cheap
Over the past several years, many well-regarded professional investors have tried their hand at buying financial stocks. Even before the financial meltdown truly began, Bill Miller of Legg Mason Value Trust believed that financials represented good value, figuring that fears related to the then-called subprime mortgage crisis would abate before it could do serious damage to big banks, and therefore loading up on stocks like Citigroup (NYSE: C ) , JPMorgan Chase (NYSE: JPM ) , and Countrywide. Miller's mutual fund paid the price for being early, losing a whopping 55% in 2008.
Since then, other pros have made the plunge. Manager of the Decade Bruce Berkowitz saw his Fairholme Fund drop more than 32% in the first nine months of 2011 as his huge bets on Bank of America (NYSE: BAC ) and AIG (NYSE: AIG ) have thus far brought big losses to fund shareholders.
The temptation to cash in on perceived value may seem almost undeniable. But if you don't want to get trapped by the same falling knives that have seriously wounded top experts, let me suggest looking to companies that can count on continuing business from Wall Street no matter what.
Helping you by helping the Street
Behind many of Wall Street's largest banks and brokers are companies that provide professional custodial services. No, we're not talking sweeping the floors and emptying the trash -- much as they may need it. Basically, with all the rules and regulations that govern the financial industry, most big banks turn to third-party service providers to make sure they stay in compliance with them.
Wall Street banks have complained that increasing scrutiny over their operations threatens their long-term profitability. But it's nothing but good news for custodial services companies, because more complex regulation increases the incentive for potential customers to turn to them rather than trying to keep their compliance and custody operations in-house.
The three big players in the industry are Bank of New York Mellon (NYSE: BK ) , Northern Trust (Nasdaq: NTRS ) , and State Street (NYSE: STT ) , and each of them has said what investors and populist demonstrators love to hear: They're profiting from Wall Street's regulatory pain.
Here are some details:
- State Street saw stronger third-quarter revenues as the amount of assets under custody jumped sharply. CEO Jay Hooley said that "as expense pressures intensify for our clients, they are increasingly looking to outsource more services to us."
- BNY Mellon specifically noted new customers who had previously handled their own affairs. CEO Gerald Hassell thinks the move suggests "a long-term trend" that could bring the company even more business in the future.
- Northern Trust saw earnings jump almost 10% as revenue from both custody and asset management services rose enough to offset higher costs.
Moreover, things will likely only get better for these companies. There's no sign that the push toward more regulatory scrutiny is likely to reverse anytime in the near future. Moreover, as banks and brokerage firms look for new ways to make money, they'll want to spend less time and effort worrying about their own compliance -- instead turning to companies like Northern Trust, State Street, and BNY Mellon to get it done for them.
Don't miss out
It's too easy just to say that Wall Street banks and brokers are greedy corporations that don't deserve the support they've gotten. Like it or not, these institutions do work that millions of people indirectly count on. But rather than losing your shirt by buying their shares directly, the best way to tap into their riches may well be through the institutions that make it possible for Wall Street to do its work.
At the other end of the too-big-to-fail spectrum, The Motley Fool has unearthed a couple of stocks that the government can't afford to do without. Find out the names of these two small-cap stocks in this special free report today.