There's no doubt that the first half of this year is one that investors would like to forget. The stock market is off to its worst start in over 50 years, with the S&P 500 index falling 21% through June.
Bear markets can be mentally taxing for investors, but history suggests that they present great buying opportunities for those investors who are patient. Since 1950, the average correction in the market lasts about six months.
Investment banks have been hit especially hard, seeing deals come to a screeching halt. While short-term pain could continue, demand for deals remains strong. Current fears have many of these companies trading at a valuation so cheap they are hard to ignore. Here are three stocks to consider.
1. Evercore Partners
Evercore Partners (EVR 1.59%) advises clients on mergers and acquisitions (M&A), raising capital through debt and equity, and restructuring debt. Evercore's revenue highly correlates with the volume of M&A activity, which tends to be high when economic conditions are strong. One source of revenue that is countercyclical to this is debt restructuring, which is in more demand when economic conditions are weak.
Despite slowing M&A activity, Evercore posted record revenue in the first quarter of $723 million, up 9% from last year, while earnings per share were up 17%. This came at a time when other investment bankers saw revenue drop. Even though there were fewer deals in the quarter, advisory revenue increased 22% because the average size of those deals was larger. Equity underwriting was down 54% but is a smaller share of Evercore's total revenue.
The second quarter for Evercore could be more of a struggle since deal activity remained low. The share price reflects these fears, and Evercore trades at a P/E ratio of 5.2 -- its lowest since the 2008 financial crisis. Its price-to-tangible book value (P/TBV) of 2.9 is the lowest since March 2020 and the lowest since 2012 before that.
Evercore has a strong balance sheet, with $455 million in cash and equivalents and another $1.1 billion in investments. The next few quarters could be rough for investment banks. However, deal pipelines are strong and if economic conditions improve in the second half of this year and into the next, investment banks could see a rebound in earnings.
2. Moelis & Co.
Moelis & Co. (MC 3.73%) is very similar to Evercore, advising clients on M&A, restructuring debt, and raising money through capital markets.
Despite the slowest quarter of M&A deals in seven quarters, Moelis & Co. grew revenue by 14% from last year to $302 million -- its best first-quarter earnings ever. The company saw fewer deals during the quarter, but the completed ones earned higher fees on average.
Moelis & Co. has been a strong cash flow stock, with its free cash flow growing at 19% compounded annually over the past decade. Moelis & Co. also has a strong balance sheet, with $302 million in cash and no debt -- and can reward investors with solid dividends and the occasional special dividend when the business is doing well. The stock trades at a P/E ratio of 7.5, its cheapest valuation since 2015.
The company could see short-term pain in earnings in the next quarter or two. However, if economic conditions remain challenging, it could see its restructuring business activity pick up and help smooth out some fluctuations in its earnings.
3. Morgan Stanley
Morgan Stanley (MS 1.95%) has traditionally relied on investment banking activities like helping companies go public through initial public offerings (IPOs) and raising money through debt. Like other investment banks, changes in economic conditions could cause a feast-or-famine situation for Morgan Stanley's earnings.
To make earnings more resilient across business cycles, the company spent $20 billion acquiring the E*TRADE trading platform and Eaton Vance, an asset manager. E*TRADE gives Morgan Stanley a steady stream of commissions and fees income, which could do well in volatile markets if increased trading activity follows. Meanwhile, Eaton Vance gives it a stable income stream from managing clients' assets.
Lackluster IPO activity dragged its first-quarter investment banking revenue down 37% year over year. However, other businesses picked up some slack; total revenue fell 6% while net income fell 11%. By comparison, Goldman Sachs -- also a strong player in the IPO business -- saw its revenue fall 27% and net income fall 43%.
Morgan Stanley trades at a P/E ratio of 9.4, below its 10-year average. However, you can make the argument that it deserves a higher multiple now with its diversified revenue streams -- giving it a valuation too cheap to ignore.