3 Private Equity Value Stocks for You
Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
U.S. equity markets are down after the Federal Reserve chief made it clear that its bond buying program will slow. Meanwhile, concerns about shrinking manufacturing in China failed to offer any help to markets.
This scenario cannot be seen as a positive for equity markets but it doesn't mean you should stop investing in the markets. Private equity firms appear to be cheap and profitable. Don't believe me? Take a look.
$108 million profit
Oaktree Capital (NYSE: OAK) is a global investment manager specializing in alternative investments. The company had $78.8 billion worth of assets under management as of its last quarter. Oaktree Capital thrives by identifying opportunities in less efficient markets through investments in distressed debt and corporate debt.
As is evident, drying capital availability in the markets may push some companies into distress, which would be a beneficial scenario for Oaktree Capital. It also generates revenue by managing assets of large global institutional investors, including 75 of the 100 largest U.S. pension plans.
During 2012, the company swung back from losses and posted a net profit of $107.8 million. It continued the trend in the first quarter, with net income jumping threefold to $57.6 million. On a forward earnings basis, the company is priced at 10.2 times while still offering a dividend yield of 10.9%.
Speaking of dividends
Similarly, Prospect Capital (NASDAQ: PSEC) offers an excellent dividend yield of 12.6% at a current market price around $10.50. This financial services company’s main business is to lend and invest in middle market privately held companies.
Financially, the company has had a strong track record even when most other companies were struggling. From a top line of $100.5 million in 2009, Prospect Capital has grown its annual revenue to $320.9 million in 2012.
In its most recent nine months, the company has already crossed this milestone, with total investment income of $409.8 million and a net investment income profit of $232.8 million. The stock currently even trades at an attractive forward price earnings multiple of 8.2. It even has a reasonable debt to equity ratio of 0.55, yet its stock trades at a discount to its book value. And that's at a time when strong and profitable companies are trading at exorbitant valuations.
Get a fort
New York based Fortress Investment (NYSE: FIG) is another investment management firm with strong fundamentals. Unlike many of its peers, this private equity company has a low debt equity ratio of 0.16 which could be seen as foolishly low. However, this low reliance on debt comes as a handy tool when a company has to navigate through tough times. When capital becomes scarce, companies with high reliance on debt witness margin contraction.
On the contrary, Fortress Investment saw its net profit margin expand nearly 5%, in its most recent quarter, to 27.5%. For the full year 2012, this figure stood at 22.5%. Revenue also experienced a 50% jump during to $191.2 million.
Fortress Investment’s stock has gone up more than 60% so far this year and still has buy ratings from analysts. It's not difficult to see why, as its forward earnings multiple of 9.5 screams undervalued. At the same time, the stock offers a dividend yield of around 3.5%t.
Foolish bottom line
Overall, private equity is not a direct play on drying liquidity. But at the same time, it is not difficult to see how private equity players stand to benefit as growth capital becomes scarce. The fact that these private equity firms offer solid dividends makes them a solid investment.
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Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool recommends Oaktree Capital. The Motley Fool owns shares of Oaktree Capital. 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!