Investment Banking Sector Appears Undervalued (SF, TWPG, GS, MS)

In an article on Seeking Alpha, Chad Brand said that the deal between Stifel Financial (NYSE: SF) and Thomas Weisel Partners (NASDAQ: TWPG) caught his attention. Yesterday SF inked a deal to purchase its investment banking rival for about $7.60 per share in stock, representing a premium of about 70% for shareholders. Chad had recently written positively about Goldman Sachs (NYSE: GS) and the latest acquisition reinforces his opinion that the investment banking sector is undervalued.

Stifel’s payment of $7.60 per share in stock equates to about 1.85 times book value and 2.1 times net tangible assets. “Given the economic and political climate, it was not surprising to see this deal get priced at the lower end of the historical range, but I was still very happy to see that the range remained relevant in a deal that actually got done in 2010,” Chad elaborated.

It is difficult to believe that TWPG, which is only a small specialized investment banking firm, fetched more than global franchise giants like GS and Morgan Stanley (NYSE: MS). Going by the price paid for TWPG, both GS and MS appear attractive at today’s prices. “To reach a price-to-book ratio of 1.85, Goldman Sachs shares would need to rise about 50% from current levels. Morgan Stanley is even cheaper and would need to rise by more than 60% to reach that valuation level,” Chad said.

To conclude, the buyout of Thomas Weisel yesterday strengthens Chad’s bullish convictions on Goldman Sachs and it seems that Morgan Stanley is a similar story.

To see more trading ideas, click here.