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2 Outrageous Turnaround Stories
03/15/2012 11:32 am EST
This year will have more than its fair share of amazing rebounds, says Hilary Kramer, but these two stocks are among her favorite plays for a turnaround strategy right now.
We’re talking turnaround stocks with Hilary Kramer. I guess this is a perfect market to be looking not only for value, but for turnarounds like this that are outrageous values from your perspective. What do you have for us? What have you been looking at, first of all?
I have been focusing on the stocks that have been under $10, or that have fallen from the $20s down to the teens, that were really hurt because they’re small caps and there was a lot of destruction after the S&P downgrade of the US debt.
We lost about 22% in the Russell 2000. Some of those stocks were very strong, positive, momentum-growing stocks, but they came off because it was deleveraging time, and the small stocks always have more volatility on either side as a market goes up or down.
Now, I brought you two stocks today that I believe have doubling potential.
Janus Capital Group (JNS), at $8 a share, is the asset-manager mutual-fund company that we all remember from 1999 to 2000—Internet, telecom funds—but in actuality Janus has close to $170 billion of assets under management, much of which falls under different names and is money managed for institutions, fixed-income money, value-oriented funds.
Janus has a $1.6 billion market cap. But yet to manage that quantity of money, it doesn’t make sense or compute, because when asset managers are acquired, sometimes it's ten cents on the dollar. That would make it a $16 billion company, which would mean it’s a ten-bagger.
I’m not trying to say that this is a 1000% return, but simply double from here, when consolidation takes place and other companies out there—like Legg Mason, T. Rowe Price, Trust Company of the West, Fidelity, State Street, whatever the company may be—decides that they want to get in and buy some customer accounts and buy some assets that they want to grow. Maybe it’s a BlackRock or a Blackstone.
So that would be Janus. And the company, although earnings have been flat, it’s been growing in assets under management, and it has the potential to be very value-additive for any kind of large-cap money manager.
Now, another company that I brought today that’s particularly interesting, I want to jump to as long as I’m in financials, is Fortress Investment Group (FIG). Now, FIG is different from Janus. Fortress is a hedge fund of funds that has hedge funds within its umbrella that are credit oriented, real estate, long short equity, a fixed-income fund, and opportunities funds.
The stock here is trading in the $3 to $4 range. It was as high as $42, went public in the high $30s, went down to $1 when the market came off in 2008-2009, and has been doing a wonderful job buying up assets like mortgage services, like for mortgage-servicing companies, so that they’ve had the opportunity to pick up assets in the real estate market.
The potential for this to be a double or triple of a stock is very high. The reason being that right now, the valuation only really is taking into account the 1% to 2% of assets under management that would be collected in fees each year that flows down to...earnings, but it hasn’t even taken into account any future profit.
Remember the way hedge funds work: it’s an 80/20 split. So that 20%, if it’s a billion dollars, $200 million is going to flow into Fortress. And even after they pay their bankers and pay the senior-most management, there is still going to be money that’s going to flow down that earnings quarter.
You could see a stock like this with such a small market cap—well under a billion dollars—really jump and jump quickly as money managers pile in there. You know, it’s really a great stock to own.
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