There's No Place Like Hermes

Money management firm Federated Hermes FHI has been around since 1955, yet is not well known by most U.S. investors. Perhaps it's time for that to happen. Over the past decade, FHI showed substantial growth across all major business metrics. That occurred in spite of record low interest rates, which has necessitated fee waivers on money market funds, which used to provide a good chunk of Federated Hermes' earnings. Whenever short-term interest rates rise again that income source should rebound dramatically. FHI posted all-time record EPS in 2020 and figures to eke out a slight improvement again in 2021. First-quarter numbers matched Value Line's estimate of 75 cents, up 19% from the 63 cents earned in the same quarter a year earlier. FHI changed hands for $31.83 as recently as April 15. In early afternoon on Friday, it was available at just $28.40. That unjustified sell-off provides a good opportunity to establish new positions. What makes FHI a bargain right now? Total return on its shares were just 51.55% over exactly 10 years. That's only 41.5% as much as the earnings per share have grown over the same period. Embedded value, which is not being reflected typically translates into catch-up moves higher. FHI is net debt-free. Treasury cash far exceeds total debt. There are no pension liabilities and no preferred shares. Earnings predictability is in the top 5% of all 1,700 stocks in Value Line's main research universe. At $28.40 per share FHI yielded a generous and well-covered 3.8%. The modest dividend increase shown in the 10-year numbers above was the result of a payout ratio decrease from 66% to about 33%. From that lower, more conservative, number future dividend increases are likely to be larger than historical ones. The pre-COVID years from 2011 through 2019 saw FHI carry an average price-to-earnings of 15.1-times, accompanied by around 3.73% in yield. At present, FHI is offered for just 8.7-times this year's estimate along with a slightly better than typical yield. A simple regression-toward-the-mean 14 multiple could easily send FHI up to about $45 within a year. That's not far fetched. FHI topped out between $33 and $38 during all seven of the years 2014 through 2020. Most of those years' fundamentals were well below present day levels. Yahoo Finance is unwilling to be quite so bullish. It calls for $32.64 for FHI by April of 2022. I'd call that way too conservative as it implies a final price-to-earnings of just 10.1-times, about 33% below the stock's long-term average. Even so, hitting that very modest goal would provide 17.5% in total return. Compounding at that rate would double your money in about 4.1-years (pretax). Most people these days would be quite happy to see that on their entire portfolio. Option-minded traders could consider augmenting long positions with the sale of naked puts out to FHI's Oct. 15, 2021 expiration date. With FHI at $28.40, worst-case, forced purchase prices would have dropped to either $23.60 or $26.00 depending on which strike price was employed. Maximum profits on these, or any other option sales, always equals keeping 100% of all premium received up front. In the examples shown, that would equal either $140 or $400 per 100-share commitment. Federated Hermes is not a home-run kind of stock. It is a blue-chip name at a very reasonable valuation. The conservative 12-month return should be about 17.5%. If my more own goal is met, that could reach over 63%. Either way, potential upside appears to far outweigh risk. Buy some FHI shares, sell some October 2021 puts or consider doing both.

There's No Place Like Hermes

Federated Hermes is not a home-run kind of stock, but it is a blue-chip name at a very reasonable valuation with great upside potential.

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