3 flying financial stocks. I’d buy one of them today

G A Chester uses a rule of thumb learnt from Nick Train to value these three financial stocks. It highlights one of them as top value.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Most financial stocks have rebounded strongly from last year’s market crash. They include asset managers Jupiter Fund Management (LSE: JUP), Liontrust Asset Management (LSE: LIO) and Polar Capital Holdings (LSE: POLR).

Here, I’ll explain why owning shares in asset management companies can deliver above-market returns. I’ll also discuss the current valuations of these three stocks and reveal which one I’d buy today.

Turbocharged performance

In theory, asset managers like Jupiter, Liontrust and Polar are geared plays on the stock market. This is because their revenues come from levying a charge on their assets under management (AUM). As stock markets tend to rise over the long term, the value of managers’ AUM should rise, increasing their revenues with no extra effort or costs. Furthermore, successful companies also earn performance fees and attract inflows of new money into their funds.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

One of the risks for investors in asset managers is falling stock markets. At such times, the aforementioned turbochargers of their profits go into reverse. And inevitably their share prices too. For this reason, I think it’s particularly important to look for a good margin of safety in the valuations of asset managers.

How I value these financial stocks

A good while ago, I picked up a tip on valuing asset management companies from Nick Train (a.k.a. Britain’s Warren Buffett). Invest only when the stock is valued at less than 3% of AUM. Over the years, I’ve found this a useful rule of thumb.

I wrote about Jupiter, Liontrust and Polar (in separate articles) back in the summer of 2018. The table below draws together their valuations at the time.

2018

Share price (p)

Market cap (£bn)

AUM (£bn)

Market cap/AUM (%)

Jupiter

453

2.07

46.9

4.4

Liontrust

605

0.31

11.3

2.7

Polar

700

0.65

13.4

4.9

As you can see, based on the 3% rule, Liontrust at 2.7% was the only one of the three stocks I considered buyable. Jupiter and Polar, at 4.4% and 4.9% respectively, were far too highly valued for me. Let’s fast-forward to today.

All change

Much has changed in the financials of the three stocks, as you can see in the table below.

2021

Share price (p)

Market cap (£bn)

AUM (£bn)

Market cap/AUM (%)

Jupiter

286

1.58

58.8

2.7

Liontrust

1,864

1.14

33.3

3.4

Polar

862

0.86

22.7

3.8

The shares of Liontrust, my ‘buy’ stock of 2018, have risen 208% from 605p to 1,864p. This has been helped by the market rerating the stock from the ‘cheap’ 2.7% of AUM in 2018 to 3.4% today.

Polar’s shares have advanced a more modest 23% from 700p to 862p. Its gains were constrained by the market derating the stock from the ‘pricey’ 4.9% of AUM in 2018 to 3.8% today.

Finally, the Jupiter share price is down 37% over the three years from 453p to 286p. Again, its performance was negatively impacted by a market de-rating. In this instance, from a ‘pricey’ 4.4% of AUM in 2018 to just 2.7% now.

How I see these financial stocks today

Jupiter is the only stock currently valued at less than 3% of AUM. It’s on the same 2.7% rating as Liontrust was in 2018. As such, Jupiter looks very buyable to me today. Certainly there’s the aforementioned risk that AUM and the share price could drop significantly in a falling stock market. But hopefully, the low valuation mitigates that.

The valuations of the two highest-rated stocks today — Liontrust at 3.4% and Polar at 3.8% — are much less extreme than the two highest of 2018 (4.4% and 4.9%). If I owned Liontrust and Polar, I’d be inclined to hold at sub-4% of AUM.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Jupiter Fund Management and Polar Capital Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »

Close up of manual worker's equipment at construction site without people.
Investing Articles

Down 65% from its highs, this FTSE 250 stock is one to consider buying low

Shares in a strong FTSE 250 company going through a cyclical downturn have caught Stephen Wright’s attention as a potential…

Read more »

Investing Articles

£20,000 invested in a Stocks and Shares ISA 5 years ago is now worth…

Stocks and Shares ISA investors have reaped enormous returns since the pandemic, but how much money have they actually made?…

Read more »