3 Financial Stocks to Benefit From Equity Flows
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As volatility picks up and funds start flowing into equities, several financials are becoming more interesting as investment options. During 2013, money has started flowing into equity funds after years of massive outflows into fixed income funds. Some interesting stocks to follow are Interactive Brokers (NASDAQ: IBKR), Janus Capital Group (NYSE: JNS), and Virtus Investment Partners (NASDAQ: VRTS).
After a record $38 billion flowed into equity mutual funds in January, the fund flows have been mostly lumpy in the last few months. Conversely, bond funds have held steady inflows for the year until June with a smashing $28 billion pulled out of mostly taxable funds in the week ending June 26 alone. A total of over $60 billion was pulled out of bond funds for the last four weeks of June. Unfortunately, the money didn’t pile into equity funds, but that could only be a matter of time. The below stocks could benefit greatly from that eventual shift.
See chart below for the five-year returns:
The stock of Interactive Brokers has gone virtually nowhere over the last five years. The company should benefit from the surging stock market as funds that moved out of bonds eventually find a suitable equity fund or move into a separately managed account.
For June, the company reported 531,000 daily average revenue trades (DARTs) compared to only 460,000 DARTs for January. Also, customer accounts have increased from 212,000 to 224,000 thousand during that period. The biggest issue has been the market-making unit that was crushed during Q1 due to low volatility and currency losses. Stabilization in the market-making unit and continued growth in trading accounts should lead to substantial earnings growth.
Mutual fund from the past
As with Interactive Brokers, Janus Capital performed horribly over the last five years as the market soared. Undoubtedly, the 18% loss during that period was one of the worst by any investment-related financial stocks considering the bull market during that period. Janus was a leading growth equity mutual fund back in the late 1990s that hasn’t seen a rebound since that period.
For Q1 2013, Janus reported that AUM slightly declined year-over-year to $163.8 billion. Revenues as well declined, suggesting Janus has not yet recovered from the post-2000 collapse. As assets flow into equity funds in the next few years, Janus could be a huge beneficiary though currently the company is struggling to attract investors clearly turned off from the company’s connection with the collapse of Internet investments.
The stock has a reasonable earnings multiple of only 12 times 2014 estimates suggesting the stock could see considerable upside if fund flows do improve.
New kid on the block
Virtus Investments Partners has come out of nowhere to produce one of the best five-year returns. The stock was virtually unknown at that time point and still only commands a market value of $1.4 billion after a 1,600% return.
For an asset manager, Virtus had an incredible net flows increase of 99% to $3.7 billion in Q1 2013. AUM are only $51.2 billion providing the company plenty of runway for growth as the major asset managers have $500 billion in AUM. With the huge asset growth, the company has seen earnings soar from $4.66 last year to expectations of $8.49 for 2013. Analysts expect Q2 earnings to nearly double from only $1.04 last year to $2.03 this year.
Interestingly the company saw huge inflows into the Virtus Emerging Markets Opportunities Fund due to notifying customers that investments would be limited to existing shareholders as of February 1, 2013. With the weakness in the emerging market funds, the next quarterly report will define whether or not this fund and Virtus were only riding the wave. The stock only trades at 16.5 times forward estimates, which most see as cheap considering the growth rates.
Considering the potential for huge flows into equity funds, these three stocks offer huge potential for gains in the next few years. Both Interactive Brokers and Janus Capital offer different options for rebounding stocks after a very weak five-year performance. Virtus Investment Partners has had the hot hand that could potentially get even hotter during a period of strong fund flows.
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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Interactive Brokers. 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!