February 22, 2021 BARRON’S M3
a surge in trading and capital markets activ-
ity. Pure-play investment banks such as
Goldman Sachs Group(GS) andMorgan
Stanley(MS) posted record profits, driven
first by a jump in fixed-income trading in the
earlier part of the year, and then by a flood of
initial public offerings and the resumption of
mergers and acquisitions later in 2020.
Some may wonder how the banks will
fare given the tough comparables they face
from last year. There are signs that some of
that momentum can continue. While the
volatile trading that roiled stocks like
GameStop(GME),AMC Entertainment
Holdings(AMC), andBlackBerry(BB)
was initially portrayed as a retail phenome-
non, larger institutional investors and
hedge funds also participated in the trad-
ing, likely increasing activity at investment
banks, at least for the first quarter.
Goldman and Morgan Stanley should
also continue to benefit from an increase in
M&A as low interest rates provide a favor-
able deal-making climate. Then there’s the
pandemic, which has forced businesses to
rethink their strategy, causing some to con-
sider buying and joining with others.
Data from Goldman shows that there was
a 100% year-over-year jump in M&A activ-
ity in January, with the energy sector being
the only one that saw a drop in activity.
Global deal-making is strongest in utilities,
healthcare, and technology.
Initial public offerings have also proven
to be robust, with 56 new offerings having
priced this year, raising a combined $21.7
billion, marking year-over-year jumps of
180% and 331%, respectively, according to
Renaissance Capital. That activity bodes
well for banks like Goldman, Morgan Stan-
ley, and evenJPMorgan Chase(JPM).
Yet Goldman and Morgan Stanley have
other levers to pull even if capital-markets
activity abates. Goldman is in the early
stages of a yearslong effort to build out its
consumer banking offerings. Just this past
week, it unveiled Marcus Invest, a digital
investing platform geared to retail investors.
Goldman, at $315.62, trades at 10.5 times
forward earnings, slightly above the bank’s
five-year average but below its high of 13.8,
which is roughly where some peers cur-
rently trade, according to FactSet data.
Morgan Stanley, meanwhile, largely ac-
complished its pivot to more predictable,
fee-revenue businesses a few years ago, but
investors can still look forward to synergies
from the bank’s recent acquisitions of
E*Trade Financial and Eaton Vance to pro-
pel shares. Morgan Stanley, at $76, cur-
rently trades at 13 times earnings, which
matches its peer group but is below the
bank’s five-year high.
“Goldman Sachs and Morgan Stanley
are undervalued and not appreciated by the
market,” Steven Chubak, managing direc-
tor at Wolfe Research, recently toldBar-
ron’s. “Over the last year, the gap really
started to widen.”
For investors hoping to do more than bet
on a heightened IPO market, there are com-
pelling reasons to look atBank of America
(BAC). BofA is one of the larger banks more
sensitive to interest rates, implying more
upside as the economy improves.
“It’s cheap relative to history,” Chubak
said. The bank currently trades at $34.54,
or 13.8 times forward earnings, putting it in
line with peers but above its five-year high
of 16.1. “As you start to normalize for rates
and credit, you’re talking about a stock
with a $40 handle,” he added.
Investors could also get exposure to the
sector by buying into the SPDR S&P Bank
ETF and forgoing stock-picking. But either
way, with capital markets activity looking
to remain robust in the near term and the
economic recovery under way, banks look
like a compelling opportunity.
— Carleton English
Industry Action
Performance of the Dow Jones U.S. Industrials, ranked by weekly percent change.*
Oil & Gas 2.72%
Telecommunications 1.72
Financials 1.32
Basic Materials 1.10
–0.09 Industrials
–0.20 Consumer Services
–1.62 Utilities
–1.71 Technology
–1.72 Consumer Goods
–2.52 Health Care
- For breakdown see page M36. Source: S&P Dow Jones Indices
Visit http://www.sectorspdrs.com or call 1-866-SECTOR-ETF
COMMUNICATIONSSERVICESSECTOR
OFTHES&P500INONEETF
An investor should consider investment objectives, risks, charges and expenses carefully before investing. To obtain a
prospectus, which contains this and other information, call 1-866-SECTOR-ETF or visit http://www.sectorspdrs.com. Read the
prospectus carefully before investing.
AllETFsaresubjecttorisk,includingpossiblelossofprincipal.SectorETFproductsarealsosubjecttosectorrisksandnon-diversificationrisks,whichgenerally
resultsingreaterpricefluctuationsthantheoverallstockmarket.Ordinarybrokeragecommissionsapply.
TheS&P500isanindexof500commonstocksthatisgenerallyconsideredrepresentativeoftheU.S.stockmarket.Youcannotinvestdirectlyinanindex.
ALPS Portfolio Solutions Distributor, Inc., a registered broker-dealer, is distributor for the Select Sector SPDR Trust.
Upgrade
youradvisor.
Get advice on managing your wealth
and connect with a top advisor at
barrons.com/directory
©2020 DowJones & Company.All Rights Reserved. 2E205