Consumers Now Saving? Play the Trend With BlackRock
If spending is out and saving is in, consider owning companies like BlackRock that benefit from higher savings rates.
If one of the big knocks on economic growth and retail stocks is that consumers are saving a lot more these days rather than spending, why fight the trend?
A great way to play this trend is to own companies that benefit from higher savings rates -- and one that tops my list right now is BlackRock (BLK). BlackRock is the largest asset manager in the world, with over $3 trillion under management. Plus its stock is in a sharp pullback from the start of the year. It's traded down 37% to $152 from $240, partly for reasons which don't really make much sense.
I've been telling readers to buy below $145-$150 for trading positions or long-term entries -- a tactic that's worked so far. Another way to enter the stock, or collect some cash, is to sell naked puts a month or two out in expiration, with slightly out-of-the-money strike prices of $145 or $150. Either the stock gets put to you, which isn't so bad because it's most likely a good long-term hold, or the puts that you sold expire worthless and you pocket the premiums, at which point I'd roll over short put positions into either of the following two months.
The Great Consumer Deleveraging
Consumers are understandably frightened by what they just went through in the credit meltdown, so they continue to deleverage, or pay down debt and curb spending, or they're being forced to do so by banks and credit card companies tightening lending standards. US consumers socked away 6% of disposable income in the second quarter, three times as much as they saved right before the credit markets blew up. If the past deleveraging cycle in the 1990s is any guide, we are still in the midst of this trend, and it will continue for some time.
Enter BlackRock. It has attained massive size through big game hunting -- an ongoing campaign of purchasing large asset managers like Merrill Lynch Investment Managers a few years back, and Barclays Global Investors late last year.
But those big purchases create a temporary problem for BlackRock: It suffered $34 billion in fund outflows last quarter as institutional investors moved assets to avoid being too concentrated with one firm, following the Barclays acquisition.
Another problem is that the weak second quarter for the stock market reduced BlackRock assets under management. The asset manager also saw nearly $25 billion in cash-management outflows as investors sought higher yields elsewhere. All of this looks grim, and it hit second-quarter earnings growth.
But keep in mind, much of this is probably just temporary. That reallocation of institutional money to avoid asset manager concentration won't last forever. Plus I believe the stock market is more likely to go up than down from here -- or at least sideways. So a repeat of the second-quarter decline in assets under management because of market weakness may not play out. And while BlackRock lost $25 billion in outflows in the second quarter, it also generated $28 billion in new (net) long-term business that quarter. And it says it has another $60 billion of unfunded new business in the pipeline. As consumers continue to deleverage and save more, that adds to the pool of assets that BlackRock can manage, going forward.
Long-term, the company looks strong because it manages a very high portion of institutional money which tends to stay put (except after takeovers of other asset managers). And it has a diverse portfolio of active and passive money management products, and a broad geographic reach.
Because of these factors, going long below $145-$150 or selling naked puts to collect premium looks reasonably safe -- barring another overall market meltdown, which I don't see in the cards. Plus BlackRock has triple-tested what now looks like resistance at around $137 a share -- which should reassure those who believe in technical analysis.
One word of caution: When selling naked puts, remember to limit sales to size that would give you only an amount of stock you'd feel comfortable owning anyway, if the stock gets put to you. Don't go crazy with it. Set limit orders when trading options, and let the prices come to you. The bid-ask spreads are too wide, and options prices are notoriously volatile, so reasonable limit orders tend to get hit.
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