This Stock Could Be the Next Big Value Winner

There are certain industries out there right now that just can't seem to shake a bad image. Of course, I am talking about the financial services industry. Financial companies seem to compete head on with airlines as the most often talked about, and almost always hated, stocks. It's certainly within reason -- both industries, on the whole, seem reluctant to get their acts together. But, guilt by association is unfair, and in the land of the unfair lies opportunity for the value investor in each of us.

Another spin off… really?
Yes, really. I love spinoffs, so deal with it. Consider this: In 2005, Buffett's favorite credit card company, American Express (NYSE: AXP  ) split in two. The new company was Ameriprise Financial (NYSE: AMP  ) . Ameriprise, in its various incarnations, has been around for over 110 years. The diversified financial services company owns more companies than you want to know, one of them being the highly profitable H&R Block tax servicer.

Ameriprise, as spinoffs love to be, was successful right out of the gates. The stock nearly doubled in value from the time it started trading to just before the financial crisis. After the bludgeoning the company took during the crisis, it has slowly but surely ticked up from its near $10 per share low. Today the stock trades at around $52.

The nitty gritty
As of Wednesday, the stock trades at a mere 7.8 times forward earnings. The average analyst estimate (I know, I know) for full-year, 2012 earnings is $5.80 per share. So, trading at $52, that means you have a forward earnings yield of around 11%. The earnings yield, which is the inverse of the P/E ratio, is not an end-all valuation metric, but it does give an idea of how a company can perform versus one's risk tolerance.

So, for 7.8 times earnings, you are buying a company that just broke its net revenue records. Management seems to recognize that shares are cheap. The company took 26 million shares off the table in 2011, or around 10% of outstanding shares.

If pure value doesn't get your heart pumping, the dividend isn't too shabby, either. Over the last year, the company has increased its dividend payout three times -- representing a nearly two-fold increase in its payout. It now yields 2.8%. And during the financial crisis, the company was able to just hold its dividend steady, not slash it as was industry practice at the time.

Are you starting to see why this stock seems so promising to me?

But it's a financial company, Michael!
Yes, investor, it is. And financial companies are scary because they overleverage and take risky bets with the customer loan base. But, wait -- none of that is happening here. This isn't JP Morgan (NYSE: JPM  ) , which apparently employs sea creatures to trade billions of dollars. And, though they are in the midst of racking $6 billion in trading losses, they still trade at a similar valuation to Ameriprise -- which only seems to know how to make money.

At a recent shareholder meeting, management was incredibly enthusiastic about the current state and future of the company. The $1.5 billion share repurchase over the last year implies the company thinks its shares are trading well under where they should be. Looking forward, management expects return on equity of 15%-18%. That may sound ambitious, but for the first quarter of this year, the company earned 16% in that department. And it believes it still has room to grow as the year plays out.

I'm not the only one
Ken Fisher, of Fisher Investments, seems to like Ameriprise, too. The billionaire investor owns over 500,000 shares of the company, having recently doubled his stake. He paid around $50 per share, about where the stock trades today.

Buying what the best investors have in their portfolios isn't a bad strategy, depending on when you get in and if you are buying their better stocks (after all, the best investors are right only 60% of the time). But, nonetheless, there is something to be said for walking in the shadows of giants. Take a look at this report about stocks the very best investors are buying. It's free and could be the key to your portfolio.

Fool contributor Michael Lewis owns none of the stocks mentioned. You can follow him on Twitter @mikeylewy. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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