(January 10) – “Online stock trading did not spell the end of the traditional brokerage firm after all,” writes Patrick McGeehan in today’s New York Times.

“Two years ago, investors stared wide- eyed when the stock market value of Charles Schwab slipped past that of Merrill Lynch, the biggest brokerage firm on Wall Street. Then, the fast-growing Schwab was worth $25.5 billion and Merrill slightly less.”

“Today, Schwab is worth $40 billion, about 30 percent less than Merrill, and a growing number of analysts are predicting that the gap will widen. The latest to sour on its prospects is Henry McVey, a highly regarded analyst at Morgan Stanley Dean Witter.”

“Citing a weakening economy and a slowdown in the transfer of assets to Schwab from banks and other brokerage firms, Mr. McVey reduced his estimate of Schwab’s 2001 earnings for the third time in six weeks. He lowered his rating on the stock to neutral from outperform and suggested that investors instead buy shares of financial companies that cater to institutional clients, including Lehman Brothers Holdings and Merrill.”

“Mr. McVey said that Schwab’s long-term growth rate would be closer to 19 percent annually than the 23 percent he had been forecasting. ‘Our old 23 percent rate, which we raised materially during the Internet boom, was just too optimistic,’ he said.”

“If the Federal Reserve Board continues to cut interest rates, Mr. McVey said, the more diversified firms ‘will outperform the retail on a sustained basis.’ Among brokerage firms that serve individual, or retail, customers, he said, those that sell a variety of investment products and emphasize advice will rise faster. (Mr. McVey is employed by a firm that owns a brokerage firm that fits that description.)”

“Shares of Schwab fell $1.38, or 4.75 percent yesterday, to $27.56. After that decline, the stock still trades at about 45 times forecast earnings, compared with about 18 percent for Wall Street firms.”