When it comes to shares of asset managers and trading platforms, analysts at Morgan Stanley prefer the discount brokers, forecasted to outperform the broader market amid a period of heightened volatility for global equities.
Discount Brokers Have 'Less Market-Sensitive Exposure'
In a note to clients on Wednesday, bulls at Morgan Stanley upgraded shares of TD Ameritrade (AMTD), naming it a "top pick" alongside peers E*Trade Financial (ETFC) and Charles Schwab (SCHW), as outlined by Barron's.
"The discount brokers offer more consistent earnings with greater visibility,” wrote Morgan Stanley. “We particularly like the e-brokers’ embedded countercyclical revenue streams, with less market-sensitive exposure than the rest of our coverage.”
Analysts highlighted three key drivers of growth for the low-cost trading platforms, including "healthy asset and account growth," boosted by a trend toward independent advice and low-cost trading. As Millennials grow their wealth and look to invest in the market, many are choosing from a handful of low-cost or zero fee platforms, placing less value on whether a provider has a well-established name. Secondly, Morgan Stanley pointed to rising interest rates as a tailwind, viewed as boosting the broader financial sector following a period of low interest rates. Discount platforms may also benefit from the potential growth of account and trading commissions in volatile markets, wrote Morgan Stanley.
Analysts Forecast Stock Gains of 25% or More
The investment firm expects these factors to drive a 13% EPS growth for the discount brokers, rating all three stocks at outperform.
As for TD Ameritrade, analysts expect the stock to gain 26% over 12 months to reach $65, citing a "compelling valuation, with the stock trading at around 11 times for a double-digit earnings per share grower."
Morgan Stanley views the market as "overlooking double-digit earnings per share growth and a more defensive earnings profile" for E*Trade, which they write "offers greater certainty and visibility in a choppy backdrop." The firm's 12-month price forecast at $66 for E*Trade implies an over 25% upside from current levels.
Schwab's "capital return potential, expense management upside and sustainability of strong organic growth" should boost shares by 27% to reach $60, according to the bulls.