We’ve all heard the news that financial stocks are going to benefit from potential changes in politics and the economy; changes that include rising interest rates, falling income tax rates and potential job growth. And sure enough, money-center and regional bank stocks soared since the November general election. But not all financials have participated in this fall’s stock market run-up, and one undervalued financial stock in particular is ripe for a breakout.
If you look at the two-year stock price charts of asset management companies including Affiliated Managers Group (AMG), Franklin Templeton (BEN), Invesco (IVZ), Janus (JNS) and Legg Mason (LM), what you see are identical patterns of stocks that fell in the second half of 2015 and spent most of 2016 stabilizing.
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You and I are not the only ones noticing that asset management stocks haven’t participated in the bull market. Professional investors are going to notice this anomaly too. They just watched their bank stocks deliver incredible capital gains, but they know from experience that bank stocks are due for a pullback. They’re going to take profits on bank stocks, while reinvesting in other stocks that can capitalize on favorable economic trends. And they don’t even have to leave the financial sector, because asset management stocks are waving their hands wildly, calling “Over here! Buy me! I’m undervalued, and ready to rise!”
One Undervalued Financial Stock Stands Out
That’s all well and good, but just because a stock hasn’t gone up recently doesn’t mean that it deserves to go up. Fortunately, the fundamentals of many asset management company stocks are very attractive. I think Invesco is a particularly undervalued financial stock, an asset management company that’s based in Georgia, with offices in North America, Europe, the Middle East and Asia.
Invesco has $805.6 billion assets under management (AUM), as of November 30, 2016, almost evenly split between equity investments (48%), and fixed income and other investments (52%). These investments include mutual funds, ETFs, unit trusts, real estate and other financial instruments serving retail investors and institutional investors in over 150 countries.
Standard & Poor’s projects Invesco’s revenue to grow 5.7% in 2017. Curiously, that report was written before the stock market exploded to new highs in November. You might be thinking, well, everybody’s apparently fully invested in the stock market, causing the recent gains in the market averages. Think again. November delivered the highest level of equity outflows since December 2015. In English, that means that while stocks were booming, retail investors were cashing in.
Okay, that’s just confusing. How does the stock market go up when people are selling equity investments? My guess would be that equity mutual funds (and other types of equity investments) had enough cash on the sidelines to both cover the withdrawals and buy stocks, thereby driving up the value of the equity investments while investors were heading for the hills! Sigh. It’s a truism that in the investment world, the crowd is always wrong. For whatever reason, people’s basic instincts tell them to buy high and sell low. Successful investors somehow learn to go against the grain, study financial markets and investor psychology, and then buy low and sell high.
You have an opportunity to do that today with IVZ. Let’s look at a few key fundamental numbers.
Wall Street expects Invesco to earn $2.24 per share in 2016, $2.57 in 2017 and about $3.00 in 2018. That represents earnings growth of 14.7% in 2017—a very respectable growth rate.
As for the price/earnings ratio (P/E), it’s not often that investors see a P/E range as predictable as IVZ’s. In the years 2012 through 2015, the P/E ranged consistently between 13 and 19, then dipped a bit lower in 2016. The 2017 P/E is 12.3, meaning it’s not only an undervalued stock vs. the earnings growth rate, it’s also sitting at the bottom of its P/E range.
Invesco tends to modestly increase its dividend annually at its late-April dividend declaration. The current quarterly payout is $0.28 per share, giving the stock a current yield of 3.5%.
IVZ is a large-cap growth & income stock. Institutions own 78% of Invesco’s stock. That means professional investors think IVZ is a very good investment.
Buy IVZ at Current Prices
What we’ve got with Invesco is an undervalued financial stock that hasn’t yet participated in the market’s run-up, yet has attractive EPS growth, a low P/E and a big dividend. Now let’s look at the price chart.
IVZ reached a recent high of 41.85 in March 2015, fell in the second half of 2015, and spent the bulk of 2016 bouncing around with the oil-related market correction in February and the Brexit correction in June. The stock repeatedly rose to 32 then pulled back. Last week, the stock began reaching above 32. I think IVZ is ready to break out of its trading range and will head into the high 30s, at which point it will still be undervalued. I recommend that you buy this undervalued financial stock now.
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