Time to Play Catch-Up with Affiliated Managers Group

One of the best ways to make money over time is to purchase shares that don't fully reflect the long-term value already created via growth in fundamentals. What does that really mean? How can you identify these stocks? A quick glance at the 10-year data from Affiliated Managers Group shows what I'm looking for. From 2009 through this year's estimates, the company posted outstanding growth across all major metrics. Despite those stellar numbers, recent stock price weakness had left AMG's decade-long stock price total return at just 62.6%, versus a gigantic 617% move higher in EPS. That magnitude of discrepancy never lasts long. It is almost always arbitraged away by seeing the share price catch up to the true value that has already been earned. As a solid growth company, since the start of 2010 AMG carried an average P/E of about 24.5x based on GAAP earnings. As of the morning of Monday, May 6, 2019, traders could own AMG for just 9.9x its 2019 Value Line estimate. That was the lowest multiple ever for this fine company's shares. Even a partial reversion-to-the-mean valuation adjustment, to a still below-normal 20x, supports a year-end 2019 target price of almost $200. That offers the distinct possibility of a double from today's depressed quote. My goal price is not far-fetched. AMG peak at north of $200 during five of the six calendar years 2013 through 2018. It hit almost $180 in the outlier (2016). Sales, cash flow, EPS and dividends are all expected to be higher this year than when those prior peaks were achieved. Independent research firm Morningstar does not issue 12-month price targets. It does, however, publish what they think is present-day fair value for each stock they cover. Morningstar rated AMG a 4-star, out of 5, buy going into the May 6 trading day. It called AMG's fair value very conservatively, at $135 per share. Simply rebounding to that level would make for over 36% upside in addition to any dividends collected. AMG's current quarterly payout is $0.32 per share. That equaled around a 1.3% current yield with the shares at $98.41. Capturing the full potential rebound on AMG requires owning the shares. Option writers can play AMG on the fringes by selling some in-the-money Dec. 20, 2019, expiration date puts. The table below illustrates the actual bid/ask spreads in effect with AMG at $98.41. Worst-case, forced purchase prices on the $100, $110 and $115 strikes dropped down to between $89.80 and $94.50. For reference, the stock's Christmas Eve Capitulation low in 2018 was $88.48. AMG then quickly ran up more than $27 per share, or 30.9%, to $115.80 before the latest selloff. This high-beta stock can move like lightning once a bit of good news becomes apparent. Future stock market action can never be guaranteed. We can know for sure, though, that owning AMG below $95 would have been a winning position more than 98% of the time dating back to the first half of 2012. There were multiple chances since then to exit well above $200 and almost no periods when you would have been underwater. Why be scared to own a high-quality name at its lowest P/E ever? AMG's dividend yield is better than most bank CDs and money market accounts. Cash payments were initiated in 2017, and raised during both 2018 and 2019. Take the income and show some patience. Sometime in the reasonable future, AMG should be back near the $200 mark. Buy AMG shares, sell some Dec. 2019, puts or consider doing both.

Time to Play Catch-Up with AMG

This investment company is good value to own here.

Columnist Conversation

Sarepta Enters Breakout Territory

Facebook 's Crypto Effort Could Carry Sway in Emerging Markets

Some Hard Figure Forecasts on Facebook's Crypto Initiative

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.