Brexit Bargains Beckon the Brave

Sell-off brought many stocks into buying zones

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Jun 26, 2016
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AMG: Cheap is better than dear

Publicly traded independent research outfit Morningstar (MORN) uses a valuation-based stock ranking system which runs from 1-star (lowest) to 5-star (highest). Shares only qualify for the very best rank when their current quotes are extremely depressed versus Morningstar’s present-day fair value estimates.

Days like June 24, when global markets irrationally tanked in unison on the UK’s Brexit vote, pushed six new stocks into that hard-to-reach territory. The saving grace of huge sell-offs is the chance to put money to work at nice price points.

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I bought shares (and sold puts on) Affiliated Managers Group (AMG, Financial) after the bulk of its Brexit-day slide. The stock was already well down from a 2015 all-time high above $230 before it plunged 11.5% further last Friday.

The asset management firm sports a strong long-term record

Since the end of 2009, cash flow and earnings have been growing much faster than revenues, the result of expanding profit margins. AMG’s share price more than doubled from exactly six years earlier, even after figuring in last week’s drop.

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Value Line expects AMG to earn $9 per share in 2016 on a GAAP basis. Recent acquisitions should provide EPS growth to about $9.60 next year.

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Consensus views of analysts who buy into adjusted earnings (non-GAAP) carry 2016 to 2017 estimates of $13.34 and $15.79 (Source: Yahoo Finance).

Affiliated Managers Group has almost never been available this cheaply. Its 15.7x multiple compares favorably with its historical average of 26.6x. Four of AMG’s five previous ‘best entry points’ (green-starred below) came at P/Es ranging from 20.7x to 23.8x.

AMG’s Feb. 11 bottom was cheaper, but extremely fleeting. The shares rebounded 54%, from $116 to $179, in under three months.

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It doesn’t seem farfetched to expect the shares to command at least a 20 multiple at some time over the coming year. That supports a 12-month target price of $180, a level that was reached, or exceeded, during each calendar year 2013 through 2016 YTD.

Morningstar is more bullish than that. They see fair value as $214, almost 52% above AMG’s June 24 closing quote. Its ‘price to fair value’ chart, shown below, clearly illustrates how historically inexpensive the shares are now.

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Quantitative analysis over at S&P came to a similar conclusion regarding AMG. At the mid-June price of $151.72, S&P believed the stock had a fair value north of $200. As it is with Morningstar, AMG is one of S&P’s most statistically undervalued stocks.

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High beta shares like AMG can be scary when in retreat. The good news is that they rebound quickly as well, once traders regain confidence.

Those who bought near previous peaks, when all the news was good, have not done well. Investors who established positions when fear was in the air during 2010, 2011, 2012, and earlier this year got plenty of opportunities to take nice gains.

Affiliated Managers Group offers excellent risk/reward at today’s price.

Disclosure: Long AMG shares, short AMG December $160 puts, short AMG September $180 and $190 covered calls.

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