How we value Securities stocks
Model: Cycle-Adjusted P/B
Securities firms (brokerages) have earnings that swing dramatically with market trading volumes. Instead of using a single year's valuation, this model averages Price-to-Book over 5 years to capture a full market cycle, similar to how Shiller's CAPE smooths earnings for the broader market. If the firm is currently earning much more than its historical average (ROE > 1.3x avg), a 15% discount is applied as a mean-reversion signal.
Why this model
Brokerage earnings are highly cyclical, tied to market volumes. A single-year P/B snapshot at a market peak would overvalue the firm; at a trough, undervalue it. Cycle-adjusted multiples prevent buying at inflated peak valuations.
How it is calculated
Calculates 5-year average P/B ratio to smooth through market cycles. If current ROE exceeds 1.3x the historical average, applies a 15% discount to the fair P/B (mean-reversion signal). Multiplies fair P/B by current BVPS.
Best suited to
Brokerage and securities firms whose valuations are dominated by market sentiment and trading volume cycles.