When stock markets get going after a slump, theres a trickle-down effect that takes time to work its way through the system. Usually, somewhere in the midst of that trickle, a fountain begins to spew up from a gap in the floor. All of a sudden, the top firms find themselves in need of a fountain head to keep gushing.
So it is in the UK investment banking and advisory market right now. For a real-life example of such trend in action, look no further than gusherCenkos Securities (LSE: CNKS). Compare the recent rise of this upstart to a dreadful year for top-tier bank, Barclays (LSE: BARC) (NYSE: BCS.US), andto abelow-average 52 weeksfor mid-tier providerClose Brothers (LSE: CBG), and its easy to see how Cenkosmakes for an attractive target for a competitor of pretty much any size bigger than itself.
A Simon Peter Thats Proving The Doubting Thomases Wrong
Last year, Cenkos posted interim profits of 23.5m representing a 653% increase over the same period in the year before.
While impressive, many investors were a little weary of the results, since around half the companys H114 revenue came from what looked like a one-time deal: the IPO of insurerAA. However, a round of mayhem in the financial sector mid-year, with Barclays, RBS and Lloyds getting slammed with big fines for mis-selling totheir customers, compounded with a slow summer in equity issuances, meant that despite posting stellar profits and showing an increase of 164% in cash on its balance sheet, Cenkos was still trading for peanuts come the end of December.
Right now, Cenkos is selling for around 5x earnings, despite having proven that it can play in the major leagues with much more established competitors.
With a market cap of115m, theres simply no better value publicly listed financial services firm on the UK market right now.Lets look at some of the most compelling facts for the advisor being deeply undervalued:
- For a start, theres thatfamous AA IPO, which pretty much every analyst in the City wrote off as being overpriced initially. Since June, however, the insurerhas jumped 36% in value and it still looks cheap after paying off debt. Unbelievably, AA is starting to look like an enviable client.
- Cenkos has also had a number of wins recently fundraising for its other clients, further showing the strength of its distribution power. In the second half of the year, the advisor raised 424.9 million. Those placements will produce an estimated 20-25m income for that period.
- Accounting only for the income derived from private placements conducted in the third quarter of 2014 (estimated at 15m), Cenkos is still trading at a valuation of less than 10x earnings for the period! On top of that are broking and advisory fees, which add up to another 20% on top at least. Contrast this scenario with rivals such as Numis, where the same multiple for the period is at its most generous in the 40s, and its easy to see the recent value on offer.
Cheap But Hardly JustChips
Barclays and Close Brothers stand out as firms with distinctly average pools of talent in dire need of reinvigorating their lacklustre and heavilyinstitutionalised investment banking operations. In the past year, Barclays has posted a 16% decline, wiping out all its shareholders 5-year gains and making the stock a 15% money-loser for the period. Close Brothers earned its shareholders just 6.5% in profits last year, representing another clear downward trend after what has been a cumulative113% 5-year leap.
While Cenkos is up just 44% in the past 5 years, more than half of that has been earned in the past year alone. And the company is still a fraction of the price of any other comparable competitor!
Cenkos is exactly the kind of fountain head gushing from the spring with great management, a bulging client base and a healthy cash position that both firms need to look at to take part in what appears to be a return to exciting times for mid-cap stock issuance.
First Among Equals
It’s companies such as Cenkos that end up making investors seriously rich, since their fates are essentially one of two: either they get bought out by much larger firms, or they simply go on to disrupt the market and take their place. They are, as the cliche goes, first among equals — and buying these sorts of companies will have the same effects on your portfolio.
Similarlyat the Motley Fool, we’ve built a reputation on being some of the best in the business at spotting these kinds of picks before anyone else. In this free report, you’ll notice that while the FTSE is up just 6.9% since the start of 2012, picks by the Motley Fool Share Advisor have risen a whopping 16.1% by comparison.
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Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
