When I created an earnings-based screen back in September 2022, I said:
It is notable that a number of investment banks would appear on this screen if they weren't excluded [by my chosen screen settings] and with very high TTM Earnings Yields.
However, I specifically excluded the Investment Banking & Investment Services industry group and, therefore, the small cap brokers since these require a different approach compared to analysing other trading businesses. This is because they have unique characteristics:
They are very cyclical businesses whose performance is highly linked to stock market sentiment. The most lucrative part of their business is listing new companies on the stock market. These only happen when stock market conditions are particularly buoyant. So while the brokers may still generate fees from rescue placings in the depths of a bear market, these often only pay staff wages, leaving little profit for shareholders. For example, the 10-year EPS chart for Numis (LON:NUM) shows two periods where the EPS has dropped precipitously:
As people businesses, they have weak moats. Often listed companies have a relationship with specific brokers, and if these leave a company, the clients often follow.
They tend to hold significant cash balances, but this often represents regulatory capital and should be considered a fixed asset required for doing business, not a distributable reserve.
There is little to no research coverage on these companies. It may seem strange, given that many of these companies extol the virtues of good research coverage to their clients. However, due to regulatory restrictions, they cannot write research on themselves, and they don't want to pay a competitor to produce a note. Hence they exist in a kind of research limbo.
The listed small cap brokers are, Cenkos Securities (LON:CNKS) finnCap (LON:FCAP) Numis (LON:NUM) Peel Hunt (LON:PEEL) and WH Ireland (LON:WHI) . Investors will undoubtedly be aware of these from their role as NOMADS or advisors to other listed companies. There are a number of unlisted competitors that investors may be familiar with, such as Zeus or Liberum. There are also much larger listed peers such as UK and South African listed Investec (LON:INVP) , or the big investment banks such as US-listed Goldman…
