Small Cap Brokers: Bargain or Value Trap

When I created an earnings-based screen back in September 2022, I said:

It is notable that a number of investment banks would appear on this screen if they weren't excluded [by my chosen screen settings] and with very high TTM Earnings Yields.

However, I specifically excluded the Investment Banking amp; Investment Services industry group and, therefore, the small cap brokers since these require a different approach compared to analysing other trading businesses. This is because they have unique characteristics:

They are very cyclical businesses whose performance is highly linked to stock market sentiment. The most lucrative part of their business is listing new companies on the stock market. These only happen when stock market conditions are particularly buoyant. So while the brokers may still generate fees from rescue placings in the depths of a bear market, these often only pay staff wages, leaving little profit for shareholders. For example, the 10-year EPS chart for Numis (LON:NUM) shows two periods where the EPS has dropped precipitously:

As people businesses, they have weak moats. Often listed companies have a relationship with specific brokers, and if these leave a company, the clients often follow.