Is the time right to invest in the stocks of brokerage firms? A recent Forbes article by Megan Johnston says yes, but I'm not so sure.
Johnston notes that rising stock markets often pull up the stocks of brokerages, which is true enough. The overall stock market, as measured by the Vanguard Total Stock Market Index fund
Johnston references John Buckingham, a mutual fund manager and editor of several financial newsletters, who loaded up on some brokerage stocks back in 2004, "when these stocks were in a bit of a rut." She then notes, "Buckingham says he is not currently adding to his positions in brokerages, but he maintains it is not too late to get in. 'I think that the sector is still undervalued, and I will definitely be holding on,' he says."
Well, to me that's not a rousing endorsement. If the sector (or some stocks in it) isn't undervalued enough for him to put his money in them now, then maybe we can find better investments ourselves -- elsewhere. (For the record, Buckingham's favorite stock in the sector is Citigroup, which has the extra benefit of a fat 3.75% dividend.) It's often smart to buy stocks of good companies when they're in "a bit of a rut" -- not necessarily a year or two later, when they've risen considerably.
Still, maybe we should consider a few other things. For starters, the industry is made up of different players in different situations. Some may be more undervalued than others. TD Ameritrade, for example, is down several percentage points year-to-date. (But looking at a stock's price without much more context is not really helpful. You should do a lot more digging into other numbers and factors.)
Another consideration is that though the stock market may seem like it's picking up steam, the continuation of this momentum is in no way a sure thing. If it falls, it could easily take brokerage stocks down with it, especially those that are the least undervalued.
Want to learn more about brokerages as investments? Check out some of these Fool articles:
- Merrill's Running of the Bull
- Golden Days for Goldman Sachs
- U.S. Still Homely for Citigroup
- Morgan Stanley Trades Up
- TD Ameritrade Sipping Lemonade
- No Hibernating at Bear Stearns
Meanwhile, give some thought to the brokerage youuse as opposed to the one you invest in. You can save a lot of money and headache by making sure the one you use is best for your needs. To learn more, drop by our Broker Center, which features a handy comparison table and some special deals from sponsoring brokers.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.