3 flying financial stocks. I’d buy one of them today

G A Chester uses a rule of thumb learnt from Nick Train to value these three financial stocks. It highlights one of them as top value.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Most financial stocks have rebounded strongly from last year’s market crash. They include asset managers Jupiter Fund Management (LSE: JUP), Liontrust Asset Management (LSE: LIO) and Polar Capital Holdings (LSE: POLR).

Here, I’ll explain why owning shares in asset management companies can deliver above-market returns. I’ll also discuss the current valuations of these three stocks and reveal which one I’d buy today.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Turbocharged performance

In theory, asset managers like Jupiter, Liontrust and Polar are geared plays on the stock market. This is because their revenues come from levying a charge on their assets under management (AUM). As stock markets tend to rise over the long term, the value of managers’ AUM should rise, increasing their revenues with no extra effort or costs. Furthermore, successful companies also earn performance fees and attract inflows of new money into their funds.

One of the risks for investors in asset managers is falling stock markets. At such times, the aforementioned turbochargers of their profits go into reverse. And inevitably their share prices too. For this reason, I think it’s particularly important to look for a good margin of safety in the valuations of asset managers.

How I value these financial stocks

A good while ago, I picked up a tip on valuing asset management companies from Nick Train (a.k.a. Britain’s Warren Buffett). Invest only when the stock is valued at less than 3% of AUM. Over the years, I’ve found this a useful rule of thumb.

I wrote about Jupiter, Liontrust and Polar (in separate articles) back in the summer of 2018. The table below draws together their valuations at the time.

2018

Share price (p)

Market cap (£bn)

AUM (£bn)

Market cap/AUM (%)

Jupiter

453

2.07

46.9

4.4

Liontrust

605

0.31

11.3

2.7

Polar

700

0.65

13.4

4.9

As you can see, based on the 3% rule, Liontrust at 2.7% was the only one of the three stocks I considered buyable. Jupiter and Polar, at 4.4% and 4.9% respectively, were far too highly valued for me. Let’s fast-forward to today.

All change

Much has changed in the financials of the three stocks, as you can see in the table below.

2021

Share price (p)

Market cap (£bn)

AUM (£bn)

Market cap/AUM (%)

Jupiter

286

1.58

58.8

2.7

Liontrust

1,864

1.14

33.3

3.4

Polar

862

0.86

22.7

3.8

The shares of Liontrust, my ‘buy’ stock of 2018, have risen 208% from 605p to 1,864p. This has been helped by the market rerating the stock from the ‘cheap’ 2.7% of AUM in 2018 to 3.4% today.

Polar’s shares have advanced a more modest 23% from 700p to 862p. Its gains were constrained by the market derating the stock from the ‘pricey’ 4.9% of AUM in 2018 to 3.8% today.

Finally, the Jupiter share price is down 37% over the three years from 453p to 286p. Again, its performance was negatively impacted by a market de-rating. In this instance, from a ‘pricey’ 4.4% of AUM in 2018 to just 2.7% now.

How I see these financial stocks today

Jupiter is the only stock currently valued at less than 3% of AUM. It’s on the same 2.7% rating as Liontrust was in 2018. As such, Jupiter looks very buyable to me today. Certainly there’s the aforementioned risk that AUM and the share price could drop significantly in a falling stock market. But hopefully, the low valuation mitigates that.

The valuations of the two highest-rated stocks today — Liontrust at 3.4% and Polar at 3.8% — are much less extreme than the two highest of 2018 (4.4% and 4.9%). If I owned Liontrust and Polar, I’d be inclined to hold at sub-4% of AUM.

Our #1 North American Stock For The ‘New-Age Space Race’

Billionaires like Jeff Bezos, Bill Gates, Elon Musk, and Mark Zuckerberg are already betting big money on the ‘new-age space race’, and for one very good reason…

…because this is an industry that according to Morgan Stanley could be worth $1 TRILLION by 2040.

But the problem is most of their investments are in private companies — meaning they’re largely off-limits for everyday investors.

Fortunately, our team of analysts have identified one little-known company that’s at the cutting-edge of the space industry, and is currently trading at what looks like a VERY reasonable valuation

for now.

That’s why I want to urge you to check out our premium research on this top North American space stock ASAP.

Simply click here to see find out how you can grab your copy today

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Jupiter Fund Management and Polar Capital Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

University graduate student diploma piggy bank
Investing Articles

Should I be concerned about the windfall tax for my BP shares?

What does the new UK windfall tax mean for the BP share price? Michelle Freeman digs into the details to…

Read more »

Buffett at the BRK AGM
Investing Articles

What Warren Buffett’s wisdom and investing in stocks will teach you about life

Investing is a journey of self-discovery. So what will stocks and the words of legendary investor Warren Buffett teach you…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

5 ‘no-brainer’ income stocks to buy today!

Amid soaring inflation, I'm looking at these income stocks, offering big yields, to grow my portfolio.

Read more »

Trader on video call from his home office
Investing Articles

How I’d buy the dip in quality UK stocks with £750

Jon Smith explains the concept of buying the dip, and talks through the UK stocks he's going to buy at…

Read more »

Woman looking at a jar of pennies
Investing Articles

5 UK penny shares to buy with £5,000 today

It's hard to remember a time when there were as many tempting penny shares around as now. Here are five…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

The Scottish Mortgage share price keeps falling. Should I buy?

The Scottish Mortgage share price has collapsed from its all-time high in little more than six months. Is it now…

Read more »

UK money in a Jar on a background
Investing Articles

Value investing isn’t dead! My top stocks to buy as inflation hits 9%

As value investing principles come back into fashion, Andrew Mackie looks at the current backdrop and shares what he's investing…

Read more »

Windmills for electric power production.
Investing Articles

Which FTSE 100 shares would I buy to offset higher fuel bills?

Rishi Sunak unveiled a windfall tax this week, hitting shares of energy firms, and especially oil & gas producers. But…

Read more »