Calamos Asset Management – An Undervalued Asset

[NDQ:CLMS] Nov. 1, 2009 - $10.60
Dividend = $0.55 quarterly = 2.075% current yield

Calamos provides investment management advice and services to institutional and individual investors. The firm offers more than a dozen mutual funds and five closed-end funds, as well as separately managed accounts. Calamos has expanded its fund lineup to include equity, fixed-income, and alternative investments. Calamos Growth and Calamos Growth and Income--account for more than 40% of assets under management.


Both those flagship funds are performing very well this year with the Growth Fund up 39.2% and the Growth & Income Fund up 30.3% YTD through October [versus the DJIA’s + 10.7% and the S&P 500’s +14.7%]. Other Calamos open-end funds have gained above 28% this year and their closed-end funds have shown 52-week shareholder returns of 41.3% {CHY}, 42.2% {CHI}, 33.9% {CHW} and 57.8% {CGO}.


The shares of this fine money management firm were quite popular and highly valued prior to 2008’s market meltdown with typical P/Es in the 21 – 22x neighborhood. Earnings took a big hit last year but are recovering nicely as assets under management are rebounding.


Here are their per share numbers from continuing operations as reported by Value Line:



In the nine months ended September 30th EPS were $0.39 versus a deficit in 2008. Full year consensus 2009 – 2010 expectations now run $0.60 and $0.82 /share respectively.


That makes the forward P/E< 13x – well under the historical range since the 2004 IPO.


If the fine fund performances remain strong, I wouldn’t be surprised to see AUM increase dramatically and for estimates to get ratcheted up further. Note the high prices from each of the years 2004 – 2008 for the upside potential over the longer term.


At last week’s close of $10.60 these shares are trading at just over 1.3x the September 30th book value. CLMS has traded at 3 – 4x book value during each of the previous five years. Even twice book value would bring CLMS shares back to over $16 for a 50% move from the current quote.


The dividend yield of 2.075% is better than you can get on your money market or most bank CDs right now.


Morningstar takes a conservative view with a ‘fair value’ estimate of $12 /share. I’m much more bullish than they are but even their target would bring a 13.2% gain on top of the dividend for a > 15% one-year total return. Calamos shares actually closed at $14.83 on July 23^rd and at $14.14 as recently as October 15^th.


I was a big buyer of these shares last fall when they were ridiculously cheap. I lightened up when the shares hit $15 and now I’m buying again expecting at least $15 - $16 over the next 12 months.

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Calamos has options but they are quite thinly traded with wide bid-ask spreads.


Here is a nice trade that should be available with limit orders…





If Calamos shares bounce back to at least $12.50 (+ 18%) by May 21, 2010:


· The $12.50 calls will be exercised.

· You will sell your shares for $12,500.

· The $12.50 puts will expire worthless.

· You will likely have collected $165 in dividends.

· You will have no further option obligations.

· You will end up with no shares and $12,665 in cash.


That best-case scenario would show a total profit of $6,265/$6,400 = 97.8%

achieved in just over 6.5 months on shares that only needed to rise by 18% or more.





What’s the downside?


If Calamos shares are< $12.50 on May 21, 2010:


· The $12.50 calls will expire worthless.

· The $12.50 puts will be exercised.

· You will be forced to buy another 1000 CLMS shares.

· You will need to lay out an additional $12,500 in cash.

· You will likely have received $165 in dividends.

· You will have no further option obligations.

· You will end up with 2000 shares and $165 in cash.


What’s the break-even point on the whole trade?


On the first 1000 shares it’s their $10.60 purchase price less

the $1.20 /share call premium = $9.40 /share.


On the ‘put’ shares it’s the $12.50 strike price less the

$3.00 /share put premium = $9.50 /share.


Your overall break-even would be $9.45 /share (ignoring yield)

or $9.37 /share (including the expected dividends).


CLMS could fall by up to $1.23 /share (-11.6%) without causing

a loss on this trade.





Disclosure: Author is long CLMS shares and short CLMS options.



___________________
Dr. Paul Price: After college at The American University [BS - 1971] and dental school at University of Pennsylvania [DMD - 1977] Paul served as a dental officer in the United States Air Force both domestically and overseas in Turkey and England. As his student loans diminished he was seduced by the market. From casual investing, starting in 1977, he devoted more and more time to equity research. In 1987 he made a full-time career switch by joining Merrill Lynch. Over the next 13 years he also worked with A.G. Edwards, Wheat First [now Wachovia Securities], and Ferris, Baker Watts. Dr. Price had enough success to retire in October 2000 but continues to help friends and family with their investments. He continues to give occasional investment seminars for civic groups and business schools.

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