Would You Trust Your Retirement to These Companies?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It was a trip when I first realized how meta I could get with my investments. I can literally invest in companies where their sole purpose was to tend to investor dollars. While this is pretty crazy, it also makes me wonder about who these companies are most committed to: the investors whose hard-earned dollars they manage, or the investors who own a share of the company and... well, the other group of investors whose hard-earned dollars the company manages. It almost seems redundant to invest in the operation of a company when you can also invest in its holdings. So let's take a look at the quality of these companies as holdings in your personal fund.
American Capital (NASDAQ: ACAS) manages a huge portfolio of middle-market financing for real estate deals, structured loans and business lending. I like how the company's market cap is around $3.5 billion, it directly manages $17 billion in assets and has affiliates that manage over $100 billion. I'm really impressed by the company's 256% profit margin, though I tend to wonder at the ethics of a company that charges enough to draw such a level of fee income compared to its administrative requirements. What I really don't like is the fact that there's no dividend.
Economy of Scale
BlackRock (NYSE: BLK) is the world's biggest manager of assets. Managing more than $3.65 trillion, it seems weird that the company itself is only valued at $32 billion. That would be a lot like a guy with $1,000 in his savings account managing a six figure portfolio for someone far more experienced or successful than himself, and that concerns me. I'm also concerned that BlackRock's price/book is 1.3, meaning that it could still be considered somewhat expensive given the sum of its parts. I respect the 25.7% profit margin and I'm okay with the 3.2% dividend, as well as the enormous size and brand appreciation of both BlackRock and its Barclay's subsidiary.
Prospect Capital Corporation (NASDAQ: PSEC) handles middle-market financing for companies looking to expand their operations, rather like American Capital does. I like the fact that Prospect treats itself as a business development company, which gives it a clear legal standing. I also like that even as a fairly small $1.7 billion company, Prospect still pulls 50.9% profit margins and pays an 11.5% dividend (which I would double-check before seriously considering the company). While I normally love dividends more than almost anything else, I tend to wonder if paying such a large amount may be limiting Prospect's potential for growth, and whether that's management's intention.
BlackRock Kelso Capital Corporation (NASDAQ: BKCC) is an unusual specimen. As an originator of mezzanine loans, debt instruments that are below bond issuances and senior debts but ahead of common stock and charging a higher price than many kinds of leverage, I tend to wonder why companies choose to take on this kind of obligation. I can only imagine that a major reason is because the companies are unable to finance their intended expansions through their own bond offerings, choosing this as a better option than issuing more shares of stock. I like that BlackRock Kelso is a lean company with a $722 million market cap and 43.1% margins, and I respect the 10.3% dividend and price/book of 1. On first glance, I can't find anything overtly wrong with the company, but its purpose still seems odd.
A Difficult Sector to Read
Financial services are a complex group of companies. The best minds in the world have crafted some incredibly complicated financial products that are a serious challenge to understand, so tread carefully into these waters. You would also do well to remember that owning shares of these companies gives you absolutely no input into the holdings they take on or the operations they perform, as that's all handled internally. I'm a REIT junkie but even I don't mess with these kinds of companies. There's a lot to understand, and the amount of research required to know the company properly is astonishing to my mind. I can only imagine getting a full psych profile of the decisions-makers within each company, then analyzing all of their individual holdings followed by their marketing methods and coming out with a serious headache. Tread cautiously through this minefield.
pongun has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend BlackRock. 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.If you have questions about this post or the Fool’s blog network, click here for information.