With the market testing record highs, it's no surprise that investment banking and asset management firms are celebrating. For investors banking on continued gains for Wall Street, seven MoneyShow.com contributors highlight their top ideas in the money management sector.
All the major investment bank stocks have improved their outlook and are raising their dividends. JPMorgan Chase (JPM) , which is the country's largest bank based on its market capitalization of $386 billion, is leading the way, with profit margins rising to more than 28%.
Revenues advanced 13% to nearly $100 billion in the past 12 months, and profits jumped 35% to nearly $25 billion. It now has more than $1 trillion in cash, which is plenty to cover its $584 billion in long-term debt.
The stock is relatively cheap and is trading at under 12 times expected earnings this year. And it has beaten Wall Street expectations four quarters in a row. It reports third-quarter earnings in October.
CEO Jamie Dimon is optimistic about the company's future and the U.S. economy. Technically, the charts look positive for a breakout on the upside. Let's add JPMorgan Chase to our model portfolio and set a protective stop of $93 a share.
Goldman Sachs Group (GS) is a global investment banking, securities and investment management firm with leading positions in M&A, equity underwriting and equity trading. The company also generates significant revenue from its investing, lending and FICC businesses, while asset management is a major focus.
Goldman Sachs shares are down on the year and have seemingly been stuck in neutral for some time. Nonetheless, we were pleased to see the Wall Street titan turn in a second-quarter bottom-line beat that was more than 28% higher than consensus estimates and was the highest second quarter in nine years.
The firm also announced that Lloyd Blankfein would step down as CEO and be replaced by David Solomon. While the legacy of Blankfein is open to debate, Solomon is taking the helm with the company in solid shape and with a lot of potential ahead.
We continue to be fans of Goldman Sachs and like prospects for stronger revenue growth, operating leverage, potential de-regulatory policies and a possible higher price-to-forward-earnings multiple than the present 9.5x.
Och-Ziff Capital Management Group (OZM) is one of the largest institutional alternative asset managers in the world, with offices in New York, London, Hong Kong, Mumbai, Beijing, Shanghai and Houston.
The company provides asset management services to investors globally through multi-strategy funds, dedicated credit funds, real estate funds and other alternative investment vehicles. The firm has about $33.5 billion in assets under management.
Och-Ziff's investing goal is to generate consistent, positive, absolute returns across market cycles, with low volatility compared to the broader markets, and with an emphasis on preservation of capital. Their funds invest across multiple strategies and geographies.
Its global investment strategies use convertible and derivative arbitrage, corporate credit, long/short equity special situations, merger arbitrage, private investments, real estate and structured credit.
As one of the world's biggest hedge fund firms and one of only a handful of publicly traded ones, Och-Ziff had long stayed out of the limelight. However, they have been in the news in the last few months for installing a new slate into leadership positions, signaling a generational turnover and a rebuilding effort.
New CEO Robert Shafir has been reorganizing the company by shrinking or shuttering non-core businesses, including the company's European and Asia hedge funds. The firm had been tarnished by a bribery scandal in Africa, paying a $412 million fine to settle the charges.
Assets are growing and analysts think the performance has been solid. The OZ Master Fund (the company's largest multi-strategy fund) was up 3.1% gross and 2.3% net for the second quarter, up 6.2% gross and 4.4% net for the first half of 2018, and up 10.8% gross and 7.3% net over the trailing 12 months through June 30, 2018. OZ had distributable earnings of $7.1 million, or 1 cent a share in Q2, and $52.4 million, or $0.10 a share, for the first half of 2018. Shares outstanding have been reduced by 5.545% in the last 12 months.
We have been spotting small-cap takeovers for over 30 years; we think the next on the block to be a target is investment bank Oppenheimer Holdings (OPY) . The stock is worth $37 a share today on earnings and book value. Book value will grow by at least 10% next year and get to about $33 a share. As a result, breakup value has to be $45 to $50 a share and growing.
Meanwhile, the bank's insiders have been heavy buyers of the stock. The bank even bought back 450,000 shares -- 3% of the stock -- at under $16 in the past year; that was a great use of capital. The CEO owns 30%, so one day he will want to get paid -- and he is over 70 now.
The investment bank almost went out of business during the 2009 crash but they didn't and now they are reaping the rewards. We have three catalysts on this one -- earnings growth, interest rates going higher and takeout potential.
Evercore (EVR) has seen its dividend rise at an annualized rate of 12% over the last five years, reflecting a 25% hike in April. With less than one-third of earnings committed to the dividend, the investment-banking firm has plenty of flexibility to keep the payout growing.
The stock yields around 1.8%. With a 94 Overall score, out of a possible 100, Evercore boasts broad strength in our Quadrix quantitative ranking system, reflecting a string of strong earnings reports. In the June quarter, adjusted per-share earnings were $1.65, up 56% and above the consensus of $1.47. Revenue rose 19% and topped expectations.
Evercore is benefiting from a healthy environment for mergers and acquisitions, which helped boost advisory fees by 21%. Evercore, which I believe is capable of climbing 20% in the year ahead, is a Best Buy.
BlackRock (BLK) is a broad-based investment manager. It manages equities, fixed income, and balanced funds, along with "alternative" investments like hedge funds, pools of hedge funds (known as "funds of funds"), and funds that invest in currencies, commodities and real estate. About 58% of its $5.8 trillion in long-term assets under management (AUM) consists of equities.
BlackRock is the world leader in ETFs through its iShares brand. The downside is that index funds don't pay as well as actively managed funds. The firm's scale gives it impressive cash flow even at low fee rates. Free cash flow is approximately 30% of BlackRock's revenue. BlackRock uses its free cash flow to pay dividends (a 2.3% yield), acquire other investment management firms and buy back stock.
We believe that BlackRock can maintain double-digit EPS growth with 3%-5% net cash inflows, and 5%-7% market growth between stocks and bonds. Profit margins have gradually expanded and should also experience an EPS boost from share buybacks if it doesn't find something even more profitable to do with its free cash flow, such as acquisitions.
We believe it can grow EPS by 12% annually. Five years of 12% growth could result in EPS approaching $45. A repeat of the average high P/E ratio of 20.5x may lead to a stock price as high as $920. Adding in dividends, the total return could be 15% per year. The downside risk appears to be to $369, the product of the average low P/E of 14.5x and EPS of $25.46 over the past twelve months.
Retail investors sold off stock funds in the second quarter and reduced how much they put into BlackRock bond funds. This is a part of an industry-wide pattern that emerged in the second quarter. We expect it to be temporary because mutual funds and ETFs are the overwhelmingly popular way for individuals to invest. Related weakness in BlackRock represents a good entry point for investors.
While Janus Henderson (JHG) , a London-based global asset manager, reported second-quarter results roughly in line with Wall Street consensus, the shares fell 7.9% due to weakness behind the headline numbers. Revenues were supported by higher performance fees, but these will weaken as investment performance has deteriorated in recent periods.
Weak investment performance in their equity products will not help reverse their small but chronic asset outflows. Profit growth was uninspiring, and costs are likely to increase. However, the company admits to being dissatisfied and is making changes.
The co-CEO structure is being scrapped with former Janus CEO Dick Weil moving to the sole CEO role. We think under his unified leadership the company will improve its results as legacy Janus did when Weil led that company prior to the Henderson merger.
Janus Henderson's balance sheet remains impressively strong with $1.37 billion in cash and investments compared to $330 million in debt. The board authorized a $100 million share repurchase program and maintained its $0.36/share quarterly dividend. We remain optimistic that the company can improve itself although the turnaround could take another year. We continue to rate shares of Janus Henderson a Buy with a price target of $44.50.