This Blue Chip Is Selling for a Song
05/31/2011 12:00 pm EST
Top asset manager BlackRock carries a bargain-basement valuation despite the lofty share price, writes J. Royden Ward, editor of the Cabot Benjamin Graham Value Letter.
To consistently make money in the stock market is difficult. But when you don't adhere to your game plan or—even worse—don't have any game plan, winning in the stock market becomes almost impossible.
- Your plan needs to be simple, formalized, written down, and stored on your computer (or the electronic device of your choice).
- Your plan should include your investment objectives for the immediate and long-range future, as well as details on how you intend to achieve those objectives.
- You should review your plan's progress at least annually, preferably quarterly.
- Whenever you review your plan, figure out what you did right (give yourself a pat on the back), as well as what you did wrong. Then ask yourself the big question: What can you do better in the future?
(Here's a tip: Allow yourself to invest in a wild stock or two, but never exceed your predetermined allocation for this type of investment. We all have gambling instincts, but keep you gambling under control—allocate no more than 5% of your portfolio to risk bets.)
Discipline is key to investment success. We all lack discipline sometimes, but you can't let that happen when you're investing your hard-earned money. Don't stray from your plan and make reckless decisions.
My discipline revolves around Benjamin Graham, who is known as the father of value investing. Many consider Graham's writings to be the Holy Grail of investment analysis. Graham created several analyses to point investors in the right direction, most of which are easily learned and implemented.
So which stock will be our next big winner? BlackRock (BLK) offers great potential and fits all of my fundamental criteria. The stock price is very reasonable, too.
BlackRock is the largest publicly traded investment-management company in the world, with assets under management totaling $3.65 trillion. The company offers a variety of investment and advisory products and services to institutional and individual investors at home and abroad.
BlackRock's December 2009 acquisition of Barclays Global Investors is adding significant revenues and profits. Barclays' vast array of iShares ETF offerings will enhance BlackRock's product portfolio and lead to significant cross-selling opportunities. A recent study found that many institutional investors, such as pension funds, are investing significantly more dollars into ETFs in 2011.
During the past 12-month period, BlackRock's revenues and earnings per share (EPS) soared 56% and 48% respectively. The Barclays purchase and improved financial markets helped to produce outstanding results.
I forecast revenue and EPS growth of 15% during the next 12-month period. BlackRock could exceed my forecast if sales of iShares ETFs continue to accelerate.
BlackRock's shares sell at a reasonable 15 times my forward 12-month EPS forecast. In addition to the growth potential, BlackRock is very low risk, and the dividend yield is attractive at 2.7%.
Buy BlackRock, and don't be scared off by the ostensibly high price of $200. I think the company's stock price has a lot further to go.