Goldman Sachs and Morgan Stanley

CHICAGO--([ BUSINESS WIRE ])--Stocks featured in this weeka�s Zacks Industry Rank analysis include Goldman Sachs (NYSE: [ GS ]) and Morgan Stanley (NYSE: [ MS ]).

Zacks Industry Rank Analysis is written by Dirk Van Dijk, CFA, Chief Equity Strategist, Zacks.com.

Beware the Brokers

Most of the time in this report, I look at industries that look particularly strong based on the Zacks Rank. This week, however, I want to focus on a group that looks very weak. That group is the investment brokers.

It is a relatively large industry by number of firms, with 31 companies in it. Of those 31 firms, six of them hold the dreaded Zacks #5 Rank (Strong Sell) and another ten hold a Zacks #4 Rank (Sell). Since only the most unattractive 5% of all firms are stuck with a Zacks #5 Rank, and only the next 15% get a Zacks #4 Rank, having 19.4% of the firms in the industry at Strong Sell, and an additional 32.3% at Sell is enough to sit up and take note.

Overall the industry is in 250th place among the 256 industries we rank, with an average score of 3.61 versus 3.65 last week. Despite the slight improvement in its average score, it deteriorated by two spots from last week.

The recent downdraft in the stock market (and just about every market with the exception of longer-term Treasuries) is likely to directly hit the earnings of these companies, and will thus likely lead to further estimate cuts for both this year and next.

The first table below shows all the number five ranked firms in the industry, along with their valuations and recent changes in their mean estimates (one of the primary drivers of the Zacks Rank). Most of the firms are small caps. The big firms in the industry like Goldman Sachs (NYSE: [ GS ]) and Morgan Stanley (NYSE: [ MS ]) have neutral Zacks #3 Ranks.

Most sport reasonable P/E ratios, at least based on 2011 earnings, but the estimates are slipping and slipping fast. That raises serious questions about whether the current level of expectations will be achieved. A falling denominator can raise a P/E ratio as fast or faster than a rising numerator, and is not nearly as much fun for the investor. I would note that the larger sector, the Financials, have been mired near the bottom of the sector list for several months now.

The recent tumble in the market, coming when the wounds of the 2008 meltdown are still fresh, is not going to be good for investor confidence. Unexplained drops and recoveries of 700 points on the down over the course of an hour are not particularly helpful, either. At least for now, it looks like it is better to buy through your broker, rather than buying your broker.

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Goldman Sachs and Morgan Stanley