Today’s Buy Opportunity: T. Rowe Price Group

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As Fools well know, it’s been a dismal decade to be investing in stocks. The aughts ended with investors earning a negative total return: the first time in modern U.S. history that a calendar decade ended in the red. Investors have responded as any sentient beings with a predisposition to recent bias would: by pulling money out of stocks. Through the end of August, investors had withdrawn more than $38 billion from domestic stock funds.

This is bad news for the folks who manage those stock funds since assets under management are their main source of revenue. Since the beginning of the year both BlackRock (NYSE: BLK  ) and State Street (NYSE: STT  ) are down more than 20%, and Legg Mason (NYSE: LM  ) and T. Rowe Price Group (Nasdaq: TROW  ) are both lagging the market.

And while Blackrock, State Street, and Legg Mason face additional challenges, T. Rowe Price, perhaps the most plain vanilla of the group, looks compelling -- provided you believe the next 10 years will be a much better time for stocks than the last 10.

The big picture
Earlier this month, fellow Fool Morgan Housel made a compelling case for why history says stocks are the best buy right now. The gist of his argument is that stocks now offer a fatter yield than either bonds or Treasuries, a development that, when you compare apples to apples, has only happened twice in modern history, with both times preceding significant stock market rallies. But why are stock yields so high and bond yields so low? That’s a consequence of, as The Wall Street Journal put it recently, "[the] unprecedented bond-market rally that began in the depths of the credit crisis in late 2008 and early 2009 and has defied every prediction that it would soon run out of steam."

Yet bonds aren’t the only asset class that’s been rallying as an alternative to stocks. Gold, too, is near record highs, currency trading reached its own all-time volume high earlier this month, and even jade is now trading at more than $3,000 per ounce in China!

Stocks, in other words, are out of favor -- a fact that’s been reflected in T. Rowe Price’s recent struggles to grow assets under management (although T. Rowe offers bond funds, 80% of the firm’s mutual fund revenues and 70% of its AUM are related to equities):

Year

2005

2006

2007

2008

2009

2010

AUM

$270b

$335b

$400b

$276b

$391b

$391b

Source: Company filings. All figures, in billions, are year-end, except 2010, which is as of June 30.

While T. Rowe Price’s assets under management saw a strong resurgence in 2009 thanks to a climbing stock market, the company has failed to maintain that momentum thus far this year and is still not yet back at the all-time high of $400 billion achieved in 2007. The company’s stock, as you might guess, has basically tracked AUM over the same time period and is slightly down since the end of 2007.

But this is a good company
This creates an opportunity for two reasons. First, if you believe the stock market is poised for a resurgence over the next 10 years, now is not only a good time to invest in stocks, as we’re doing with our "11 O’Clock Stock"series, but also to invest in investing. So long as the next 10 years are kinder to stocks than the last 10, T. Rowe Price should resume its rapid asset-gathering ways. That’s particularly true given recent rumors that smaller hedge funds and asset managers are shutting down or consolidating today because of a lack of business. Survivors such as T. Rowe, a massive firm with a better than $730 million net cash position, should subsequently benefit from an even larger share of the market share pie.

Rising market share, however, isn’t the only reason to bet on T. Rowe. It’s also a well-run, asset-light business that delivers high returns on capital, and has generally steered clear of the leveraged calamities that recently befell so many of the full-fledged investment banks. T. Rowe also offers clients a selection of high-quality international mutual funds, such as T. Rowe Price Latin America (FUND: PRLAX  ) , our choice at Motley Fool Global Gains for investors who want Latin American exposure but don’t have time to select their own stocks. Thanks to its exceptional track record and reasonable expense ratio, this fund should be among the fastest-growing funds across the entire asset management industry going forward. Expressing a newfound preference for international exposure, investors have actually put $28 billion into foreign funds this year even as they were pulling money out of domestic equities. Thus, even if the U.S. market fails to recover, T. Rowe is somewhat hedged.

A few thoughts on valuation
If the market does recover, however, then T. Rowe’s stock today looks like a compelling opportunity. According to my estimates, the stock’s $50 valuation is pricing in approximately 6% AUM growth over the next decade. But before you decide if that’s high or low, remember that AUM growth is a product of two actions: (1) portfolio returns (AUM increases as the holdings increase in value), and (2) Asset gathering (and T. Rowe is a solid, trusted marketer). Assuming the stock market reverts to its historical average return, then T. Rowe should earn at least 4% to 6% annually before any additional asset gathering. Money that moves back into stocks would provide an additional kick, which makes it reasonable to expect that T. Rowe could easily grow assets 8% to 10% at the end of the decade, giving the company $700 billion under management, or just 1% of the overall asset management pie, by 2019.

Should events play out that way, then T. Rowe stock is worth between $56 and $63 per share today, giving us a 10% to 20% margin of safety. That’s solid given the quality of company here and the reason we’re investing in investing and buying shares of T. Rowe Price.

Interested in reading more about T. Rowe?  Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Previous recommendations (click here for full list of recommendations and performance):

Come back to Fool.com tomorrow for another great stock pick. There's plenty more great stock advice, and you can find video of each day's recommendation as well!

"11 O'Clock Stock" is sponsored by Motley Fool Stock Advisor. The Motley Fool will wait at least 24 hours after this publication before purchasing shares of T. Rowe Price. To see an FAQ on "11 O'Clock Stock," click here.

Tim Hanson is co-advisor of Motley Fool Global Gains. Follow him on Twitter. He does not own shares of any company mentioned. The Fool’s disclosure policy loves a good cycle. BlackRock is a Motley Fool Inside Value recommendation. The Fool owns shares of Legg Mason. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 01, 2010, at 10:46 AM, stockpatterns wrote:

    A bullish pattern was detected on TROW (T. Rowe Price Group). Find out more at http://www.beststockpatterns.com

  • Report this Comment On October 10, 2010, at 4:26 PM, UFOFred wrote:

    I agree this is a good company. The question is whether the current price is favorable.

    For what its worth, Morningstar Stocks has a fair value price on TROW of 53.00 and a buy price of 37.10 vs Friday's close of 51.62. Using Better Investing (stock club) methods, I get a similar buy price (~$39).

    I used to own some TROW but sold a couple years ago, partly based on a Morningstar recommendation.

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