This year will have more than its fair share of amazing rebounds, and this is a perfect market in which to look not only for value but for possible turnaround scenarios in companies that may have taken hits to their stock prices.
I have been focusing on stocks that were trading under $10 or that have fallen from the $20s down to the teens and were really hurt because they’re small caps and there was a lot of destruction after the S&P downgrade of U.S. debt.
Some of those stocks were very strong, positive, momentum-growing stocks, but they lost ground because it was time to deleverage, and small stocks always have more volatility on either side as a market goes up or down.
These two stocks are among my favorite plays for a turnaround strategy right now — I believe they have the potential to double in price.
Janus Capital (NYSE:JNS) is the asset-manager mutual-fund company we all remember as specializing in Internet and telecom funds from 1999 to 2000. In actuality, Janus has close to $170 billion in assets under management, much of which falls under different names and is managed for institutions, fixed-income money, and value-oriented funds.
Janus has a $1.6 billion market cap. But that doesn’t make sense or compute, because when asset managers are acquired, sometimes it’s at 1o cents on the dollar. That would make it a closer to a $16 billion company.
I’m not trying to say that this is a 1,000% return, but simply double from here, when consolidation takes place and rivals such as Legg Mason (NYSE:LM), T. Rowe Price (NASDAQ:TROW), Fidelity (NYSE:FIS) and State Street (NYSE:STT) decide to buy some customer accounts and assets they want to grow.
That would be Janus. And while earnings have been flat, assets under management have been growing and the company has the potential to be very value-additive for large-cap money managers.
Fortress Investment Group (NYSE:FIG) is another great buy in financials. FIG is a hedge fund of funds that has hedge funds within its umbrella, including real estate, long and short equity positions, a fixed-income fund, and an opportunities fund.
The stock is trading in the $3-to-$4 range. It was as high as $42 before going public in the high $30s. When the market ticked down in 2008-2009, it fell to $1. Still, FIG has been doing a wonderful job buying up assets, such as mortgage-servicing companies, using the strategy to pick up assets in the real estate market.
This stock has a the strong potential to double or triple, as the valuation only really takes into account the 1% to 2% of assets under management collected in fees each year that flows down to earnings. That figure does not take into account any future profits.
Remember the way hedge funds work: It’s an 80/20 split. So if the 20% represents a billion dollars, $200 million is going to flow into Fortress. Even after it pays its bankers and senior management, there’s still going to be money flowing 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, making FIG a great stock to own.