For Growth, Value and Income in Financial Services, There Is Calamos Asset Mangement!

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While the financial service sector has roared back with the broader stock market, there are still niche firms that have not surged with the others.

Calamos Asset Management (NASDAQ: CLMS), an asset management company specializing in convertible bonds, is up less than 5% for 2013 with the Standard & Poor’s 500 Index higher by more than 20%, and the Rydex S&P Equal Weights Financial Exchange Traded Fund (NYSE: RFY), up over 29% for the same period. For value, growth, and income investors, Calamos is much more appealing overall than others in the financial services sector such as Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), and T Rowe Price (NASDAQ: TROW).

In terms of just the cash on its balance sheet, Calamos Investment is undervalued by more than 50%. Trading around $10.70, there is $24.95 in cash per share on the left side of the ledger. At a price-to-book ratio of 1.11, it trades at a discount compared to others in the financial services sector. The price-to-sales ratio for Calamos Asset Management is just 0.70, meaning that every dollar of sales goes at a 30% discount to the stock price. By contrast, the price-to-sales ratio for Morgan Stanley is 1.60; for Goldman Sachs it is 1.77; and for T Rowe Price, it is 5.97. The industry average price-to-sales ratio is 2.77.

For growth investors, Calamos is finally moving in the right direction. The low interest rate environment has reduced the number of convertible bond offerings, suppressing the competitive edge of Calamos Asset Management. But with interest rates rising, so should the earnings for Calamos. Higher interest rates will cut into the margins of other financial services firms, but create more opportunities for Calamos as more convertible bonds will likely be issued.  While the earnings growth rate of the past five years was a negative 6.30% due to the low interest rate environment, it is projected to be 10.00% for the next half decade. The operating margin of 35.60% shows how efficiently the company is managed compared with others in the industry (Morgan Stanley at 7.90% and Goldman Sachs at 27.10%). 

The income component of Calamos Asset Management rounds out the stock as a potentially promising investment for the financial services sector. 

While the average dividend yield for a member of the Standard & Poor’s 500 Index is around 2%, and 3.60% for the financial services group, it is more than 4.60% for Calamos. The funds on the balance sheet and robust cash flow provide plenty of capital to raise the dividend and/or initiate a stock buyback program to reward shareholders. That has been proven over the last five years as the dividend growth rate for Calamos Asset Management has been 24%, with the industry growth rate being only 6.80%.

As the table below shows, Calamos is very attractive compared to other companies in the financial services sector for its value, growth and income attributes:

<table> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p><strong>Calamos Asset Management</strong></p> </th><th> <p><strong>Goldman Sachs</strong></p> </th><th> <p><strong>T. Rowe Price</strong></p> </th><th> <p><strong>Morgan Stanley </strong></p> </th><th> <p><strong>Industry Average</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Price-to-Sales Ratio</p> </td> <td> <p>0.76</p> </td> <td> <p>1.77</p> </td> <td> <p>5.97</p> </td> <td> <p>1.60</p> </td> <td> <p>2.88</p> </td> </tr> <tr> <td> <p>Price-to-Book Ratio</p> </td> <td> <p>1.11</p> </td> <td> <p>1.09</p> </td> <td> <p>4.58</p> </td> <td> <p>0.89</p> </td> <td> <p>1.75</p> </td> </tr> <tr> <td> <p>Price-to-Free Cash Flow</p> </td> <td> <p>2.00</p> </td> <td> <p>73.20</p> </td> <td> <p>46.00</p> </td> <td> <p>2.50</p> </td> <td> <p>(30.70)</p> </td> </tr> <tr> <td> <p>Price-to-Cash Ratio</p> </td> <td> <p>0.43</p> </td> <td> <p>1.26</p> </td> <td> <p>13.46</p> </td> <td> <p>2.99</p> </td> <td> <p>n/a</p> </td> </tr> <tr> <td> <p>Operating Margin</p> </td> <td> <p>35.60%</p> </td> <td> <p>27.10%</p> </td> <td> <p>46.20%</p> </td> <td> <p>7.90%</p> </td> <td> <p>n/a</p> </td> </tr> <tr> <td> <p>Dividend Yield</p> </td> <td> <p>4.60%</p> </td> <td> <p>1.20%</p> </td> <td> <p>2.00%</p> </td> <td> <p>0.70%</p> </td> <td> <p>3.60%</p> </td> </tr> <tr> <td> <p>Dividend Growth Rate 5-Year</p> </td> <td> <p>24.00%</p> </td> <td> <p>13.24%</p> </td> <td> <p>15.99%</p> </td> <td> <p>(6.41%)</p> </td> <td> <p>6.80%</p> </td> </tr> <tr> <td> <p>Price Rise 2013</p> </td> <td> <p>4.94%</p> </td> <td> <p>32.82%</p> </td> <td> <p>17.70%</p> </td> <td> <p>46.58%</p> </td> <td> <p>29.01%*</p> </td> </tr> </tbody> </table>

Sources: The Motley Fool CAPS, Finviz; *Rydex S&P Equal Weights Financial Exchange Traded Fund

Based on the damage that was done to the financial services sector from high leverage, the superior cash position of Calamos provides tremendous risk mitigation should bear market conditions return again to the financial services sector.  This capital pillow provides a cushion for the company in the event of a downturn.  It will also do much to ensure that the dividend payment continues.

Adding more to its allure has been heavy insider buying at Calamos Asset Management.

Motley Fool co-founder and CEO Tom Gardner stated that if there was just one factor he had to use for investing that, "I wouldn't look for growth. I wouldn't look for a great balance sheet. I'd focus only on insider ownership." John Calamos SR, the Founder and Chief Executive Officer of his eponymously named firm, has been buying steadily since early June without a sale. More than ten of those transactions involved purchases of more than 10,000 shares each. In toto, he owns more than 1.6 million shares of Calamos Asset Management.

There is “growth” and a “great balance sheet” loaded with cash at Calamos Asset Management. The income received in the form of a dividend is very healthy, too. It has been a good year for the financial services sector, and the future looks equally as promising for Calamos Asset Management.


Jonathan Yates has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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