To quote the late gonzo journalist Hunter S. Thompson: "When
the going gets weird, the weird turn pro."
I would characterize the current state of the market as weird --
so, following the Good Doctor's advice, it's definitely time to
turn pro and capitalize on that weirdness. Fortunately, I've
found just the stock for the job.
If you're familiar with my work for StreetAuthority, then you
know about my penchant for asset management stocks. I favor these
stocks for the predictability of their fee-based revenue streams
and because they're often undervalued by the market.
Oaktree Capital Group (NYSE:
complements those criteria with an extra attribute that makes the
stock even more attractive -- its focus on alternative investment
Now, "alternative investments" is an extremely broad category
that encompasses everything from simple shorting strategies to
complex hedging and everything in between.
Oaktree deals primarily with six particular asset classes:
distressed debt, corporate debt, control investing, convertible
securities, real estate, and traditional listed equities. If you
don't know what one or more of these categories are, that just
shows the firm's uncommon expertise. Oaktree has a special skill
set, and the numbers show it.
Oaktree generates consistent revenue by charging fees for its
management of assets. The firm earned $77.8 billion in fee
revenue in the first six months of 2014, up 20% from the same
period last year. This trend is expected to continue.
The company's second-quarter earnings report exceeded
expectations, but the firm remains undervalued. OAK is trading
near $49, off 21% from its 52-week high, and sports a forward
price-to-earnings (P/E) ratio of 12, well below the S&P 500's
estimated P/E of 16 this year. OAK also pays an impressive
dividend yield of nearly 8%.
On top of being undervalued, Oaktree shows strong signs of
growth. Earnings per share (
) came in at $0.75 a share in its most recent quarter, beating
analyst estimates by 12%. Oaktree's EPS is forecast to grow 12%
in its 2015 fiscal year, to $4.61.
As mentioned, Oaktree's wheelhouse as a money manager is the
alternative investment space. Typically, the types of investment
strategies have little to no correlation to the mainstream stock
and bond markets.
For example, distressed debt investing is largely unaffected by
the broader market. Investment managers like Oaktree will
purchase the debt of a troubled or bankrupt company for pennies
on the dollar. When the company is restructured, acquired or
recapitalized, investors are in a position to reap huge rewards.
It doesn't really matter if
went up or down a couple of points.
And as the broader markets slow down, grow more volatile or
return gains, institutional and ultra-high-net-worth investors
use these strategies to enhance a portfolio's performance and
mitigate risk. Declining markets or heightened uncertainty bring
customers to Oaktree's door -- and that means increased fees and
revenue. That's why I love asset management stocks.
Risks to Consider:
Oaktree is good at what it does, but its ability to raise
money and earn fees is only as good as the performance of its
investment products. If weak and uncertain markets bolster
performance, then strong equity markets can hamper the
performance of alternative investments. This in turn hurts client
acquisition and fee increases (as seen with PIMCO's Total Return
Action to Take -->
Based on the current uncertainty of the broader markets in
relation to the climate of geopolitical risk and fears of rising
interest rates, Oaktree Capital is poised to benefit. This should
translate into accelerating earnings. With its solid operating
history and unique business model, the price could reach $60
again in 12 to 18 months. With the nearly 8% dividend, that's a
potential total return of 30%.
If you like the idea of turmoil-proof stocks, we've found
a group of stocks for you.
Our research has uncovered a set of companies that helped shelter
investors from the worst downturns. Not only has the strategy
returned an average of 15% per year since 1982, but it's
outperformed the S&P during the dot-com bubble and the 2008
financial collapse. To learn more,
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