The Best Financial Stock for 2007: Legg Mason

To an investor, what is the most beautiful business model in the world? How about a model that's highly profitable, easily scalable, and generates substantial returns on equity and other shareholder measures? Sounds nice, eh? All too often, investors are asked to pay through the nose for such wonderful businesses. Not in this case.

Try Legg Mason (NYSE: LM  ) on for size. That is, if you can get your arms around its massive $945 billion or so in assets under management. I tried, but those dollar bills take up a lot of space.

What's not to like?
The powerhouse asset manager is trading at a substantial discount to peers like Blackrock (NYSE: BLK  ) when we use the popular 2% of assets under management rule, favored by top value investor Marty Whitman. The recent Citigroup deal places the company in rarefied air with global big boys like UBS AG (NYSE: UBS  ) and Credit Suisse Group (NYSE: CS  ) . Heck, if margins improve and we get a wee bit of P/E expansion, this could be a huge winner in 2007. Not surprisingly, our own Philip Durell has picked the company for his market-beating Inside Value service.

This downtrodden asset manager has been nicked for having a difficult time digesting the acquisition of Citigroup's (NYSE: C  ) asset management business. However, there are signs that the company's ship may be turning. For one thing, Bill Miller's famous 15-year run of beating the S&P 500 is over. In other words, the brutal pressure to continue that calendar streak has been lifted for the skilled money manager, and in a way, a lot of the pressure on the company has been removed as well. Missing estimates for a few quarters certainly ratchets down expectations, which is why last quarter's results were such a pleasant surprise for Wall Street. Continued cost rationalization and skilled asset retention should be the catalysts for investors to continue to bid up shares of this well-run company.

It's not just me
I wrote a bull case on Legg Mason a few months back, and our own Alex Dumortier concurred a few weeks later. Fellow Fool Matthew Crews was a little more hesitant on the company's prospects, though. That's OK -- on the Motley Fool CAPS service, Legg Mason is a four-star stock, and more than 250 players have given it a big green thumbs-up, including 86 of 88 CAPS All-Stars.

What do you think of Legg Mason's prospects? Go to Motley Fool CAPS right now and make your voice heard. If you agree with me, rate it "outperform," and if you don't, rate it "underperform." Based on your responses, we'll crown the "Best Financial Stock for 2007" sometime next week.

See all of our Foolish candidates for the best financial stock, and add your own rating in Motley Fool CAPS.

Fool contributor Stephen Ellis owns shares in Legg Mason, but no other companies mentioned. You can view the stocks he owns and check out his 99th-percentile ranking in CAPS. Legg Mason is a Motley Fool Inside Value pick. The Motley Fool has a disclosure policy.


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