It's easy to overlook things... especially if you're not
really looking for them.
It's the approach most investors have had with financial
stocks. Since the crisis of 2008, the financial services business
has changed radically. The "too big to fail" firms --
Bank of America (NYSE:
JPMorgan Chase (NYSE:
Wells Fargo (NYSE:
and the like -- have enjoyed stock price rebounds but still
suffer from constant regulatory scrutiny and risk.
#-ad_banner-#Their earnings multiples are temptingly low, but
for good reason: uncertainty. It's really hard to figure out how
these firms make money and how much they're going to make going
forward. So the market, which gets it right every now and then,
doesn't have a whole lot of confidence in their ability.
It's even worse for super regional and regional banks.
Traditionally, they've had to lend money to make money. Since
2008, despite the Federal Reserve's best efforts to encourage
them to do so, they just won't lend money. Most of their revenue
is derived from existing business and "feeing" their current
customers to death. That's a poor business model that no one
should invest in.
So once past mega-cap financials and regional banks, other
financials tend to get overlooked. However, I have found a group
of financial stocks that are extremely attractive both as
growers, dividend payers and potential consolidation
During a recent breakfast with a veteran money manager, the
talk turned to his shop's parent company's acquisition plans. It
seems that the consensus is that the best value in financial
stocks lies within the asset manager stocks.
I agree. It's a simple, consistent business model: bring in
assets, manage those assets for your clients, and charge a fee.
Despite the challenges of financial markets, it's an incredibly
predictable business for a well-established firm. Here are three
that are worth a look.
|1. Manning & Napier (NYSE:
|Founded in 1970, Manning & Napier is an independent
investment firm that currently manages nearly $50 billion.
Through separately managed accounts, mutual funds, and
collective investment trusts.
Two things impress me the most about this company.
First, it was founded in 1970 -- and has survived a lot of
bad markets between now and then. Clearly this is a firm
that knows its stuff.
Second is its return on assets. Historically, the
average ROA in the investment management business is
somewhere around 50 basis points (bps), roughly half of a
percent. Manning and Napier's is nearly 50% higher, coming
in at around 75 bps.
The result is investment management revenue growth of
11% year over year, to $376 million in 2013. The 2014
projection is for $414 million and $476 million for 2015.
That's revenue growth of 9% a year, leaving plenty of room
for an upside surprise in MN. The company also boasts
operating margins of 46%. The stock is a bargain at around
$15 a share, a forward price-to-earnings (P/E) ratio of
12.4 and an attractive dividend yield of 4.2%.
|2. Invesco (NYSE:
|Over the past decade, Invesco has evolved into to one
of the world's largest and most diversified asset managers.
Offering everything from traditional mutual fund products
to boutique private equity investments tailored for
institutions and high net worth individuals, the firm is
currently most recognized for its rapidly growing exchange
traded funds (
) business under the PowerShares brand.
At the end of February, Invesco reported total assets
under management of $791 billion and fund inflows of over
$1 billion for that month alone. Those results were coming
off of the heels of an excellent 2013. Revenue for the year
grew 11%, to $4.6 billion, from 2012, and earnings per
) grew 30%, to $1.95.
Analysts have boosted the company's 2014 EPS forecast to
$2.48, a 27% increase. Now, that may be a stretch based on
last year's huge stock market performance. However, Invesco
is well-positioned thanks to its multi-asset profile,
especially its ETF products.
IVZ currently trades around $35.50 with a 14.6 forward
P/E and a 2.5% dividend yield. This is a reasonable price
to pay for a company with the scale Invesco possesses.
|3. Alliance Bernstein (NYSE:
|Whenever I write about financial stocks, Alliance
Bernstein usually ends up in the mix. I've been following
this company in its different incarnations my entire
career, and it's always worked out. (Since
I discussed this stock in January
, for instance, it has gained 11%, compared with the
S&P 500's 4% gain in the same time.)
My thesis for Alliance Bernstein is still in place.
Currently, the firm manages over $450 billion. The main
attraction has always been the company's master limited
) structure resulting in the handsome 7.2% annual
distribution rate. But as the first-quarter advance in the
stock price demonstrates, AB is a great growth vehicle as
Revenue grew at a staggering year-over-year pace of
161%, to $186 million last year. EPS jumped at an even more
impressive rate with 235% growth, to $1.71 a share. Part of
that growth is due mainly to resurgent equity markets
resulting in positive inflows, which is the name of the
game in the asset management business.
However, expectations are somewhat tempered for 2014
with analyst forecast calling for EPS of $1.90,
representing an 11% increase over 2013. Still, AB
represents an excellent value. Double-digit earnings growth
at around $24.70 a share with a forward P/E of 13 and a
7%-plus yield is enticing.
Risks to Consider:
The biggest challenge facing all three, of course, would be
choppy financial markets. Nervous fund investors always vote with
their feet. Fund outflows mean shrinking management fees.
Alliance and Invesco are probably best positioned to play
Action to Take -->
Grouping these stocks in a basket values them with an average
forward P/E ratio of 13 and a blended yield of 4.7%. On a forward
P/E basis, that's a 13% discount to the S&P 500 and over
twice the yield of the index. On average, all three are
delivering around 4% monthly growth in new assets under
management. Based on those numbers -- and the fact that the
basket delivers financial sector exposure with growth potential
-- 25% upside is feasible. Allowing for dividends, that's a
potential total return approaching 30%.