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Without Jefferies, Jefferies Sure Has Bounced Back

Inside Wall Street


When you think of brokerages, Jefferies Group may be the last name that comes to mind. But institutions know Jefferies: It's the firm pros call when they want to buy or sell large chunks of shares quietly. Now, some of these major players are buying shares of Jefferies.

Why the interest? "We think Jefferies is very undervalued," says a partner at an investment firm that has acquired a stake of over 5%. "It's well-capitalized for a broker, and its earnings are on the rise."

Investors had shied away from the stock after founder and previous Chairman Boyd Jefferies pleaded guilty in 1987 to insider-trading charges. Jefferies resigned and sold his shares, and the firm has slowly recovered.

In the so-called third market, Jefferies provides liquidity by trading Big Board stocks among institutional investors away from the exchange. And Jefferies is building a fourth market through its proprietary electronic-trading systems. The company operates a network known as POSIT for the U.S. and European stock markets and also runs QuantEx, a portfolio-tracking and management system for institutions.

"Both are part of a growing collection of off-exchange, computer-based trading systems," says analyst John Keefe of Lipper Analytical Securities. He figures POSIT handles some 3 million shares a day and QuantEx about 1 million. Jefferies' electronic systems are used mainly by "quantitative" money managers whose institutional portfolios include "indexed" funds that attempt to replicate the stocks in stock market averages, such as the Dow Jones industrial average or the Standard & Poor's 500-stock index.

EARNINGS SURPRISE? This fourth market turned a profit this year and will be a "significant bottom-line contributor next year," says Jefferies' President Frank Baxter. That's why some insiders think earnings this year and next will exceed expectations. Analyst Perrin Long of First Michigan expects 1992 earnings of $1.85 a share and about $1.70 next year. "Those are way too low," says a Jefferies insider, "based on the business we have been seeing so far this year." The corporate finance and junk-bond trading it has added to its operations are profitable.

One big investor argues that Jefferies is less sensitive than other brokerages to market or economic ups and downs. So while other brokerage stocks have pulled back after rallying to highs late last year, Jefferies has continued to climb, to 15 from 9 in mid-December. Even after that rise, Jefferies is selling below its book value of $17 a share and trading at a modest price-earnings ratio of 8.2. This pro expects the stock to double over the next 12 to 18 months. He notes that several insiders have been buying, including Baxter, who already owns 9.1%.GENE G. MARCIAL

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