Oppenheimer (OPY): Stock Sales Buoy Investment Banks

According to Oppenheimer (OPY) bank analyst Chris Kotowski, who took over when famed analyst Meredith Whitney started her own firm, companies selling stock to raise capital will be a boon to investment banks in the second quarter. Kotowski’s estimates that U.S. firms sold about $122.6 billion worth of stock in the quarter, about 9 times greater than the previous quarter and twice the quarterly average since 2005. Obviously, this is great news for investment banks as the fees associated with these secondary offerings will boost investment banking revenue beyond where it was in the first quarter. His projections were the subject of Bloomberg’s Chart of the Day:

We have noted in previous posts that the rally in equity markets provided the perfect opportunity for companies lacking capital to strengthen their balance sheets by offering shares to the market. Investors seemed to have a bottomless appetite for the additional shares, as the announced secondary offerings were coming in fast and furious in May. Perhaps some investors were following the logic of Jim Cramer, who advised investors to buy on the dips that follow these offerings because the company would be better capitalized. Not to mention Cramer is bullish on the market in general right now. Even investment banks themselves were keen on the idea of secondary offerings as Goldman Sachs (GS) and JP Morgan (JPM) were among the companies that tapped the well in the second quarter.

This new found growth in investment banks’ revenue is also being spread around a smaller number of firms after the attrition in the industry that has occurred with the fall of Lehman Brothers and Bear Stearns. No doubt, this is one of the reasons that Kotowski is bullish on many investment banks. At Ockham, our methodology is much more cautious in regards to many of these financial firms because there stocks have advanced, and often doubled or more, well ahead of a corresponding fundamental improvement. Reports like this suggest that the fundamental strength is beginning to return, but these stocks do not fit our value investing philosophy at current price levels.

Oppenheimer: Stock Sales Buoy Investment Banks

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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