The average retail investor, looking for some toward profits in today’s confusing market environment, can usually choose one of two basic strategies. The first is the traditional stock market path, that of share appreciation, while the second is the safer, more defensive, route through dividend payers. But what if an investor doesn’t need to choose between these routes?
According to JMP Securities, there just may be such a dual strategy available for investors, right now, in the form of alternative asset management companies. These are typically small- to mid-cap firms, offering financing and capital access services to small business and mid-sized enterprises, a sector that has traditionally driven innovation and job creation in the US economy. As JMP’s Brain McKenna writes in a recent industry note, “The alternative asset management industry has been one of (if not) the fastest-growing segments within financial services, driven by a confluence of powerful secular tailwinds…”
McKenna also dives into the inner works of several alternative asset managers. We’ve used the TipRanks platform to pull up the details on two of his picks. According to the JMP view, both of these stocks could generate a combination of considerable capital gains and dividend income – making them a potential double-fisted payday for investors. Let’s take a closer look.
Blue Owl Capital (OWL)
We’ll start with Blue Owl Capital, a leading provider of capital solutions in the private market. The firm offers its services through three direct-lender subsidiaries, Owl Rock, Oak Tree, and Dyal Capital. Working through these lenders, Blue Owl has over $102 billion in assets under management, and oversees its operations through 9 offices in North America, Europe, and Asia.
Blue Owl formed last year, through a SPAC transaction that was completed in May. The agreement, which had been approved by the relevant companies in March, saw the combination of Owl Rock and Dyal Capital with Altimar Acquisition Corporation. Blue Owl’s ticker started trading publicly on May 20, 2021, and the company had $52.5 million in AUM as of that date.
In the first quarter of this year, Blue Owl reported strong increases in its business. The company’s total AUM, referenced above at $102 billion, represents a 76% year-over-year gain, while its retail fundraise expanding by 172% y/y, to reach $2.2 billion. These solid gains in overall capital underlie Blue Owl’s strengths.
In addition, having plenty of capital makes it easy for Blue Owl to pay out its dividend. The company declared a common-share payment of 10 cents for 1Q22, a payment that annualizes to 40 cents and gives a yield of 3.2%. Blue Owl has only been paying its dividend for the past four quarters – but it has raised the payment twice in that time.
Initiating coverage of OWL for JMP, analyst Brian McKenna likes what he sees in the company’s prospects for continued growth. He writes, “In the industry today, there aren’t many firms that check all of these boxes: a) high-growth, FRE-centric model; b) the vast majority of AUM is perpetual (permanent); and c) a capital-light model that returns a large portion of earnings to shareholders through dividends. That said, Blue Owl is one alternative manager that does check all of these boxes, and we believe its business (and stock) is positioned to outperform over the longer term given these dynamics.”
A company with such an upbeat outlook on returns should get a solid reference, and McKenna puts an Outperform (i.e. Buy) rating on the stock. His price target, of $18, implies a one-year upside potential of ~45%.
JMP is hardly the only investment firm putting a sound rating on OWL shares. The stock has a unanimous Strong Buy consensus view, based on 5 recent positive analyst reviews. Shares are priced at $12.37 and their $16.75 average price target indicates a 35% upside potential in the year ahead. (See OWL stock forecast on TipRanks)
Carlyle Group (CG)
Next up is Carlyle Group, a financial services firm with business in the multinational private equity and asset management sectors. Carlyle has 26 offices around the world, through which it manages some $325 billion in total assets. The company’s business segments include global private equity, global credit, and global investment solutions.
Global investment solutions is the smallest of the segments, accounting for $65 billion of the total assets under management. Global credit, with $91 billion, comes next, and the global private equity segment, managing some $169 billion in assets, makes up the largest share of the company’s business.
Shares in Carlyle are down 30% this year, making its losses much steeper than the overall markets. These losses have come even as the company’s revenues remain sound. At $1.58 billion, Carlyle’s top line in 1Q22 spun off more than $183 million, a company record, in fee-related earnings – FRE, a key industry metric. The company’s FRE was up 42% year-over-year. On a negative note, the Q1 revenue line was down 34% from the year-ago quarter.
Even though revenue was down, the company still presents growing FRE and a balance sheet featuring $22 billion in total assets. This gave management confidence to raise the dividend from 25 cents to 32.5 cents per common share. With an annualized rate of $1.30, this dividend yields 3.4%.
Among the bulls is JMP’s McKenna who sees the risk/reward here as compelling with substantial upside potential.
“Covering the space for nearly a decade, we have observed that when the market is assigning very little to no value to performance-related earnings, it’s typically an attractive risk/reward opportunity, and we believe this is the case for Carlyle today…. We appreciate that it is always difficult to precisely predict when realizations will snap back… we have confidence that performance-related earnings will come back into vogue over time as markets/volatility stabilize, and we believe Carlyle will stand out on this front given $4B+ of net accrued carried interest,” McKenna opined.
All of this prompted McKenna to initiate coverage on CG with an Outperform (i.e. Buy rating) and $12 price target. This target conveys his confidence in CG’s ability to climb ~60% higher in the next year.
Overall, CG gets a Moderate Buy from the Wall Street analyst consensus. This is based on 11 ratings, including 8 Buys and 3 Holds. The shares are trading at $37.77, and the $62.09 average price target suggests the stock has ~64% upside from current levels. (See CG stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
