Small I-banks: Some Catching the Wave, Others Not (Yet)

With big-bank stocks soaring on optimism about improving finances, improving loans, and the return of  profits, it is probably time to look again at the small investment banks to see if there are any bargains there.  Turns out there probably are.  I-banks (esp the smaller ones) tend to be a bit like the shoemaker’s kids when it comes to relationships with the investment community, and as a result they are sometimes really neglected in earnings roundups. 

It’s true that the investment banks most likely have a later date on the recovery curve than the commercial banks — because they make most of their money in transactions, raising money, handling mergers, and providing lucrative ancillary services.  The Wall Street bazaar has been quiet for months, of course, nary an IPO, and the only M&A transactions we read about are mega-mergers like Merck & Schering-Plough hooking up. 

But you can bet the markets will begin to fill back up as the hundreds or thousands of small companies that are forming begin to be eligible for financing.  We are seeing it already in the greentech and automotive areas, of course — but the frenzy is focussed for the moment on “free” federal money.  At some point that focus will switch back to professional investors and even to the retail market.  When that happens, the rising tide may lift a lot of i-bank boats, not just Morgan Stanley, Goldman Sachs and Jefferies and their ilk.

We have reported on 10 small i-banks recently, and for the most part their shares have NOT made anyone wealthier in the last month or so.  But that may mean that some of them are real blue-light specials. 

Three of the banks we have reported on are up over the last 3 weeks or so: Houston-based (but NYC-weighted) Sanders Morris Harris Group (Nasdaq: SMHG, closed Monday at $4.04, vs $3.74 when we last looked in mid-February.  SF-based Merriman Curhan Ford (Nasdaq: MERR, closed yesterday at $0.47 vs $0.34 in February, a significant percentage improvement.  And NYC-based Broadpoint Securities (Nasdaq: BPSG, moved up from $2.56 last month to $2.68 yesterday. 

It may be worth pointing out that all 3 of these banks have been in the news.  Both SMHG and MERR are greentech and alternative energy specialists, and both are active in the OTCQX PAL program, sponsoring foreign-based companies in their US ADR (American Depositary Receipts) listings.  MERR has gathered momentum in the fixed-fee PAL sector, with 14 companies listed on its website today, and is increasingly prominent in the greentech biz as well.  SMHG, though earlier in the PAL business,  has been transforming itself from a broadly diversified financial services company into more of an asset management/private wealth management bank, and recently sold off its capital markets operation to a Chinese group. 

Broadpoint Securities has become Broadpoint Gleacher by acquiring in a $70 million cash-and-stock transaction  the M&A specialist Gleacher Partners. 

Of the other i-banks we have reported on, Miami-based Ladenburg Thalmann (Amex: LTS, reported a not-surprising downdraft in revenues for 2008, with an EBITDA loss of nearly $6 million, but at $0.55 is selling for about 75% of last year’s revenues, and about 60% of last year’s revenues if its big asset manager, Triad, had been on board all year long. 

SF-based JMP Group (NYSE: JMP, declared a cash dividend of $0.01 per share in spite of a loss for the full year of 2008 (what i-bank did NOT lose money?  Umm, lemme think — can’t think of one).  Its shares are $4.02 vs $4.60 last month, and for a pretty up-and-coming bank, the market cap of $80 million may be attractive.

Some i-banks have suffered more than others in the market.  NY-based Cowen Group Inc (Nasdaq: COWN, has been spanked for surprising the Street on the downside last month, and is trading at $4.90 vs an early-Feb $6.25, but its reputation and position on the Street may make it worth a second (or third) look.  The same may be true of Minneapolis-based Piper Jaffray Companies (NYSE: PJC,, whose $153 million loss for the 4th quarter of last year was mostly — $127 million — a goodwill charge and some downsizing expenses.  Their shares are selling for $22.93 about half its 52-week high of $45.99, in spite of its reputation as one of the “hotties” in its chosen high-tech, medical and associated industry sectors. 

Also a surprise is the way that Rodman & Renshaw (Nasdaq: RODM,
 has been taken to the woodshed by investors, following its YE results last week.  Its shares are at $0.28, vs a year-high of $2.99 and a mid-Feb price of $0.65.

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