Shares of TD Ameritrade continue to rise, as the Omaha-based online brokerage garners analyst upgrades based on interest-rate scenarios.
The company’s stock has risen about 60 percent in the past year, as investors and analysts assume higher interest rates are on the way and figure TD Ameritrade’s earnings will rise with them.
The latest investment analyst upgrades came last week, from Zacks Investment Research, which now rates the employer of 2,000 people in the metro area “outperform,” up from “neutral.”
“With a strong financial position and solid cash flow, TD Ameritrade enjoys flexibility in returning capital to shareholders and investing in future growth,” Zacks wrote in a research note. “We expect such deployment activities to continue enhancing investors’ confidence in the stock.”
TD Ameritrade is now the subject of 24 investment ratings from Wall Street firms, according to Bloomberg. There are eight buys, 13 holds and three sells.
The bullish thesis on TD Ameritrade stems from its ability, as an online stockbroker, to invest large sums of otherwise-undeployed cash that resides in customer accounts.
The company has an agreement with its largest shareholder, TD Bank, to transfer certain customer cash deposits to the bank’s balance sheet. The bank, part of Canada’s Toronto-Dominion Bank, then pays TD Ameritrade the yield earned from investing the deposits, minus fees for doing the work.
If interest rates rise, as many suspect they will after many years at near zero, it would be a windfall for TD Ameritrade, formed in Omaha in 1975 to offer steep discounts to traditional stockbrokers by taking orders via the telephone, and later, personal computers.
“There’s big upside to the stock when interest rates rise,” said Rich Repetto, an analyst for New York-based Sandler O’Neill, who has a buy rating on the shares and a 12-month target price of $30.
Not everyone is buying it. Kenneth Leon, vice president of equity research at New York-based S&P Capital IQ, is one of the analysts with a sell rating.
“It is a very expensive valuation, trading well above its peers relative to its growth rate,” Leon said. “They are very good at executing what they do, but it is very rich.”
Leon agrees that higher interest rates will be “a home run” for the brokerage industry, but the time for such ebullience “is just not right now.”