New Trade for May 26th, 2023

Amid the recent broad sell-off in bank stocks, our recommendation for today plunged along with other high-risk financial firms. But there is a massive differentiator for this name that investors are just now beginning to pick up on. In fact, this banking firm could thrive in a higher-stress environment.

LPL Financial Holdings (LPLA) 

San Diego-based independent investment advisory LPL Financial generates revenue through a small percentage of the fees and commissions of the 21,000 financial advisors using its technology. In other words, it makes a little from a lot of advisors. LPL allocates client cash to third-party banks, which pay a fixed or variable rate on the deposits. In a higher-stress environment, LPL may actually benefit because the deposits the company provides to banks will be in greater demand.  

Due to the more extensive mix of smaller accounts, LPL is less susceptible to cash sorting – where account owners move funds from low-yielding cash accounts to higher-yielding options. Cash sorting may put a dent in revenue for some firms, which benefitted last year from a surge in net interest income. 

In the first quarter, LPL added $21 billion in net new assets, an annualized organic growth rate of 7.5%. Additionally, it recently made two strategic acquisitions for around $150 million, providing a sizeable boost to the number of advisors using its products and services. As of March 31, 2023, LPL Financial’s total brokerage and advisory assets were $1,175.2 billion. Could this lead to higher earnings in the second quarter? The pros on Wall Street seem to think so. The current consensus among 15 polled analysts is to Buy LPLA, with no sell recommendations in the group—a median price target of $242.50 leaves room for a 27% upside.

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