Jefferies Is a Financial Stock That Can Keep on Rising. Here’s Why.
Bank stocks have had a big rally, but Jefferies Financial Group stock still has room to run.
One could be forgiven for being hesitant about getting into financial stocks. They have been one of the better performing sectors this year—the Financial Select Sector SPDR (XLF) exchange-traded fund has gained 28% this year, beating the S&P 500’s 12% rise—and no one wants to get in at the tail end of the trade. Now, some are concerned that the trends that have propelled financial stocks, including booming capital markets, heavy trading volume, and rising bond yields may be on their last legs.
There’s no sign of a slowdown at Jefferies (JEF), says Larry Pitkowsky, manager of the GoodHaven (GOODX) fund. In its most recent quarter, which ended on February 28, Jefferies delivered record results, including an 82% jump in net revenue to $2.1 billion and net earnings of $494 million, nearly tripling from a year ago. Jefferies’ bread-and-butter underwriting and trading segments accounted for most of the firm’s blowout results—they climbed 79% and 81% respectively—but it even saw significant gains in its merchant banking segment, which it is winding down.
Winding down businesses and offloading others has been a key part of Jefferies’s success, says Pitkowsky, whose fund had roughly 8% of its assets in the stock as of the end of February, according to fund disclosures. Jefferies agreed to sell the last of its National Beef stake in 2019, and has been winding down its merchant-banking business as it transforms itself into what it calls a “pure financial services firm.” The stock traded sideways for much of the last five years but gained 141% over the last 12 months as financial stocks recovered—and gained—from pandemic lows.
Pitkowsky credits Jefferies’ leadership team of Chief Executive Rich Handler and President Brian Friedman for the moves. Over the past few years, they have increased Jefferies’ capabilities in underwriting and trading, and boosted its return on equity to 12.8% from 2.6%, according to FactSet data.
“They don’t want to be anyone but the best version of themselves,” Pitkowsky explains, noting Jefferies’ success at investing more in well-performing segments and trimming areas that have become less profitable.
Jefferies, which closed at $33.30 on Monday, may not be able to replicate its recent outsize gains, but business should remain strong. Profits are expected to grow by 63.8% in fiscal 2021 but then grow by a more modest 10% from fiscal 2020 levels in 2022. Jefferies also has a history of timely share repurchases—it bought back $2.6 billion worth of stock over the last three years—which should bolster earnings as well. Jefferies is known for “materially successful, smart, share repurchases,” Pitkowsky says.
Even when accounting for the stock’s 37% gain this year, Pitkowsky argues that the stock still appears undervalued. It trades at 7.8 times 2021 earnings estimates of $4.34, making it much cheaper than peers such as Stifel Financial (SF) and Raymond James Financial (RJF), which trade at 13.1 times and 14.9 times forward earnings, according to FactSet data.
“I love it,” Pitkowsky says, referring to the Jefferies’ combination of valuation, strong leadership, impressive growth, and consistent capital returns to shareholders.
Carleton English
source:barrons.com
