If you're waiting for a marketwide sell-off to materialize before plowing into a bunch of new positions, then kudos. You understand that the market ebbs and flows and that you can and should use these swings to your advantage.
If you understand the market is forever rising and falling, though, then you probably also know these ebbs and flows can be rather unpredictable. That means trying to perfectly time your entries can cost more money than it saves because of the gains missed in the meantime. As always, the key is balancing the true risk of stepping into a certain stock with that stock's plausible upside potential.
Image source: Getty Images.
Shares of T. Rowe Price Group (TROW -0.64%) are too cheap right now to pass up while waiting for a market crash that may never actually take shape.
Nice work if you can get it
You know the organization. T. Rowe Price is, of course, the company that manages a large family of mutual funds with the same name. With $1.6 trillion worth of assets under its management, there's even a good chance that you're a customer.
There's also a good chance you're underestimating the reliability of the mutual fund industry's business model.
Have you ever thought about how fund companies make money? Some charge an upfront load when you enter a new position, but that's not necessarily the primary goal; that load fee is typically shared with the brokerage firm anyway. Rather, fund companies are hoping you become long-term customers so they can collect a recurring management fee, year in and year out. These fees are minimal, usually costing less than 1% of the value of assets held by a particular fund's investment pool. Once you're a fund company's customer, though, it no longer has to fight to bring you into the fold. You're annuitized, in a sense, as long as you stick with that investment -- which investors typically do. And this management fee is automatically collected regardless of a fund's performance.
The end result? A steady stream of predictable revenue and profits.
The proof of the pudding
You have only to look at T. Rowe Price Group's top and bottom lines for the last year to appreciate the premise. Despite lockdowns and the subsequent economic slowdown, T. Rowe Price managed to beef up 2020's revenue by more than 10%, driving a 15% increase in net operating income and extending a long-standing growth streak.
TROW Revenue (Quarterly) data by YCharts
Makes sense. A slew of bored consumers turned to the stock market for entertainment in lieu of sports and other live events. Indeed, 2020 ushered in the era of meme stocks and rekindled rarities like short squeezes, SPACs, and more. That mania has only been amplified this year.
Except that none of those things generate revenue or earnings for mutual funds. Fund revenue is linked only to the amount of money that fund manages. Because of this, T. Rowe Price's 2020 revenue growth can be mostly attributed to the 12.5% increase in the amount of assets it was managing by the end of the year. And that growth can largely be chalked up to the fact that the S&P 500 (^GSPC -0.58%) itself ended 2020 more than 16% above where it ended 2019.
Connect the dots. Mutual fund companies obviously want the broad market to increase in value, as that drives sales and earnings growth. Even if the market is lousy and falling, though, T. Rowe Price is still going to collect its management fees. Its biggest challenge is simply convincing investors to continue holding their funds even when times are tough for stocks.
Low valuation, high potential
The market has rewarded this revenue resiliency, for the record. TROW shares are up nearly 150% from their March 2020 low, easily outpacing the broad market's gains for the same period. Even with this big gain, though, the stock's still seemingly cheap, priced at 17.4 times this year's expected earnings and only 16.5 times next year's per-share earnings estimates. For perspective, the S&P 500 itself is valued at a trailing price/earnings ratio of nearly 30 and a forward-looking P/E ratio of 22.4. T. Rowe Price's current dividend yield of just under 2% is also stronger than the S&P 500's present yield of 1.3% and is clearly well supported by the fund company's reliable revenue and earnings stream.
Sharp investors will point out that TROW shares are relatively cheap because T. Rowe Price has limited growth prospects. But as noted earlier, for better or worse, a typical fund company's results are mostly a function of the market's overall value.
There's a kicker that could drive unexpected growth for the company in the foreseeable future, though. Late last month, T. Rowe Price Group announced plans to acquire Oak Hill Advisors, putting the company deeper into an alternative investment arena where it's not currently well represented. The combination of the two organizations presents compelling cross-selling opportunities. The deal, however, may also hint at other, similar dealmaking to come.
The smart rules still apply
Purchasing T. Rowe Price here and now, of course, makes sense only if your portfolio is in need of a financial name. If you're already heavily exposed to the financial sector or hold shares of a rival publicly traded mutual fund family, adding another one isn't necessarily your best move.
If you've got room and reason to add a financial stock to your mix, though, this one's bargain-priced given its high quality.
