Between money flowing back into the stock market and the big uptick in deal activity, asset managers — especially those with private equity businesses — are crushing it these days.
Too bad Carlyle Group (NASDAQ:CG) threw some sand in the gears Thursday when it said quarterly profit fell more than 40%, hurt by a steep drop in performance fees, an investment loss and higher compensation expense.
Shares in Carlyle tumbled as much as 13% at one point early in the session, dragging shares of other private equity firms down with it, albeit to a much lesser extent.
Of course, it’s hard to feel too bad for investors in Carlyle (which went public in May), or the other big publicly traded private equity firms. Not after the gains they’ve been racking up. During the past six months, the S&P 500 is up on a price basis by about 7%. The big private equity/asset managers have — at a minimum — tripled that jump. Just take a look at this chart, courtesy of S&P Capital IQ, below:
Kohlberg Kravis Roberts (NYSE:KKR) has gained about 20% in six months, while Blackstone Group (NYSE:BX) is up 37%. Carlyle was up nearly 47% before the big Thursday selloff. And as for Apollo Global Management (NYSE:APO)? Forget about it. That stock has rallied 65% in the past half-year.
But with Carlyle dropping sharply, is it time to take your sector winnings and walk away? Or stay long and strong and perhaps buy on the dip?
To help decide, let’s look at which stocks look like winners and which look like losers going forward:
Buy or Hold
Carlyle: The rout in Carlyle’s stock Thursday looks overdone, meaning you’d best hold what you have or maybe even buy now at a better entry point. Despite the huge recent rally, shares still appear to offer compelling valuations. With a forward price-to-earnings ratio of just 11, Carlyle trades at a steep 35% discount to its peer group, according to data from Thomson Reuters Stock Reports. Yes, fewer asset sales and lower fees hurt results in the latest quarter, but the company says it’s seeing the best environment for fundraising and investing in at least five years. And, as the recent move to take Dell (NASDAQ:DELL) private should remind everyone, buyouts looked poised to break out.
KKR: Like Carlyle, KKR appears to be cheap on a relative valuation basis. The stock trades near five-year lows by forward and trailing earnings, as well as its price/earnings-to-growth ratio, or PEG. (PEG measures how fast a company’s shares are rising relative to its growth prospects.) Furthermore, KKR has clobbered Street profit forecasts for four consecutive quarters. With deals and buyouts coming back amid cheap financing, KKR looks like it can sustain its run.
Blackstone: Yes, the stock looks attractive on a relative valuation basis, trading at discounts to just about every measure except trailing P/E (where it always gets a fat premium). And, yes, Blackstone should benefit from the same cyclical upswing in deals. But a cheap stock is no bargain if you can’t feel comfortable with its quality. For that, we turn to the shorthand of return on equity. Carlyle and KKR both sport ROEs in excess of 28%. Blackstone’s ROE stands at a comparatively paltry 8.3%.
Apollo Global: As long as we’re talking ROE, well, you can’t beat Apollo Global. It stands at nearly 80%. And shares trade at steep discounts to their own five-year averages by trailing and forward earnings, as well as PEG. They’re also cheaper than peers. Yes, earnings more than doubled in the most recent quarter, thanks to selling down stakes in some high-profile investments. But that’s not something you can bank on quarter after quarter. Besides, any time a stock goes on a 65% tear in six months, you have to be thinking about taking some money off the table. Or, at the very least, tightening up those stop-loss orders.
After all, as we saw with Carlyle on Thursday, the market is quick to turn on these names at the slightest whiff of disappointment.
As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.