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The time of dreams
Bank stocks rebounded strongly, but
Jefferies Financial Group
stock still has room to run.
We could forgive for having hesitated to enter financial stocks. They’ve been one of the top performing sectors this year — the
SPDR Financial Sector
(XLF) the exchange-traded fund gained 28% this year, beating the
S&P 500
12% increase – and no one wants to be at the back of the pack. Today, some fear that the trends that propelled financial stocks, including booming capital markets, high trading volume and rising bond yields, are coming to an end.
There is no sign of slowing down at Jefferies (JEF), says Larry Pitkowsky, director of
GoodHaven
(GOODX) funds. In its most recent quarter, which ended Feb. 28, Jefferies posted record results, including an 82% jump in net sales to $ 2.1 billion and net income of $ 494 million. of dollars, almost triple from a year ago. Jefferies’ major underwriting and trading segments accounted for most of the company’s spectacular results – they climbed 79% and 81% respectively – but it even recorded significant gains in its merchant banking segment, that it is closing.
Liquidating companies and offloading others has been a key part of Jefferies’ success, said Pitkowsky, whose fund held about 8% of its assets in equities at the end of February, according to fund disclosures. Jefferies agreed to sell the last of its stake in National Beef in 2019 and ended its merchant banking business as it grows into what she calls a “pure financial services company.” The stock has traded sideways for much of the past five years, but has gained 141% in the past 12 months as financial stocks have rallied – and gained – from pandemic lows.
Pitkowsky attributes the moves to the Jefferies leadership team, which consists of CEO Rich Handler and President Brian Friedman. In recent years, they have increased Jefferies’ underwriting and trading capabilities and increased its return on equity to 12.8% from 2.6%, according to FactSet data.
“They just want to be the best version of themselves,†says Pitkowsky, noting Jefferies’ success in investing more in high performing segments and carving out areas that have become less profitable.
Jefferies, which closed at $ 33.30 on Monday, may not be able to replicate its recent outsized gains, but business is expected to remain strong. Profits are expected to increase 63.8% in FY2021, but then grow 10% more modestly from FY2020 levels in 2022. Jefferies also has a history of timely share buybacks – it has repurchased $ 2.6 billion in shares over the past three years. – which should also increase income. Jefferies is known for its “clever and materially successful stock buybacks,” Pitkowsky says.
Even taking into account the stock’s 37% gain this year, Pitkowsky maintains that the stock still appears to be undervalued. It trades at 7.8 times 2021 profit estimates of $ 4.34, making it significantly cheaper than peers such as
Stifel Financial
(SF) and
Raymond James Financial
(RJF), which trades at 13.1 times and 14.9 times futures earnings, according to FactSet data.
“Love it,†says Pitkowsky, referring to Jefferies’ combination of valuation, strong leadership, impressive growth and consistent return on capital to shareholders.
Spoken like a true value investor.
Corrections and amplifications
The S&P 500 has gained 12% this year. An earlier version of this story indicated it was up 32%.
Write to Carleton English at carleton.english@dowjones.com
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