I love bear stock markets.
And the older I get, the more I love them.
Bear markets are some of the rare times when investors have a chance to purchase discounted shares of great companies.
Shares of alternative asset manager KKR & Co. (NYSE: KKR), for example, have been pummeled since November 2021.
At this point, the stock has been almost cut in half.
I’ve always felt that KKR is a great business to own.
KKR was founded 46 years ago as a “one-trick” private equity buyout shop, which means it buys out other businesses in hope of turning a profit down the line.
The company still utilizes that business model, but it has also evolved into a more diversified global asset management firm that invests client capital across a variety of different alternative asset classes.
These asset classes include infrastructure and real estate funds, hedge funds, credit funds, and private equity.
KKR caters to institutional and ultra-wealthy investors.
KKR makes money with its alternative asset business in three ways:
- A management fee based on a set percentage of the assets KKR manages
- A performance fee tied to the rate of return that the funds generate
- The growth of KKR’s own capital invested beside its clients’ in the funds that it manages.
I love the fact that the company invests its own money beside clients.
As of the end of last year, KKR and its employees had a whopping $26 billion invested alongside investors in the company’s funds.
The key metric to watch – and what drives earnings growth – is assets under management.
The more money KKR manages, the more money the firm makes.
At the end of KKR’s last quarter on March 31, 2022, total investments under management had reached $479 billion – a 30% increase from the year prior.
Consider that four years ago, KKR’s assets under management was just $190 billion. And this impressive spurt is a continuation of the growth that KKR has generated over almost 50 years of managing money.
The best part? Investors get to pay a decent price for KKR’s shares thanks to the stock’s recent sell-off. KKR’s current share price is about $47.
Meanwhile, KKR has $23 per share in cash and investments – investments that are ever increasing in value.
In other words, we have the chance to pay only $47 per share for $23 per share in cash and investments – a real cost of $24 for appreciating shares of KKR’s asset management business.
That’s $24 per share is for a company expected to earn $4.28 per share this year and $4.82 per share in 2023.
In other words, KKR is trading at around six times earnings.
That’s the kind of valuation you would normally see on a business in terminal decline – not a business that has steadily grown for decades.
From KKR’s inception in 1976 through December 31, 2021, KKR funds that are at least 24 months old have generated an annualized rate of return of 25.6% for investors. That’s more than double the 12.1% return posted by the S&P 500 Index over the same time period.
Any investment firm that can do that is a great business.
This tough stock market continues to serve us up great value…
I rate KKR’s shares as being in the upper range of slightly undervalued.
Valuation Rating: Slightly Undervalued
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