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Earnings ESP

The second quarter experienced an overall volatile stock market, but major equity indexes showed potency. The volatility arose from various issues including the financial policies set down by the Federal Reserve as well as the European Central Bank (ECB), continued sluggish growth in emerging markets, and the geopolitical tensions between Russia and Ukraine and the sectarian clashes in Iraq.
 
Nevertheless, investors continued to be confident and consequently the investment management industry is currently benefiting from the favorable trend. The investment management industry presently holds a Zacks Industry Rank #32 out of more than 250 industries, thus featuring in the top 30%. As a result, we remain optimistic about the performance of asset managers this earnings season.
 
Further, the asset management sector has been showing an uptrend in the last few quarters driven by a rise in net inflows. This comes as a result of growing demand from investors, with the industry exhibiting stable returns over a long time frame. It is expected to support the asset managers’ bottom line this time around.
 
At the same time, asset managers are striving hard to launch technologically advanced products, alternative AUM products, and expand business so as to attract new assets and clients. All these lead to a rise in operating expenses. Further, the industry faces a stringent regulatory landscape.
 
However, in our opinion, the industry has been witnessing a good headway. Given the overall positive sentiment in the second quarter, it is a good idea to bet on a few investment-management stocks that are poised to beat earnings estimates. An earnings beat will boost investors’ confidence in these stocks, leading to rapid price appreciation.
 
Choosing the Right Stocks
 
Picking the right stocks from the huge investment management space isn’t an easy task. One way to narrow down the list of choices is by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.
 
Earnings ESP is our proprietary methodology for identifying stocks that have the best chances of posting a positive surprise in the upcoming announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
 
Our research shows that stocks with this combination have nearly 70% chances of a positive earnings surprise.
 
For investors seeking to apply this strategy to their portfolio, we have handpicked 4 asset management stocks that are poised to beat earnings estimates this quarter.
 
Affiliated Managers Group Inc. (AMG - Analyst Report) is a Zacks Rank #2 stock with an Earnings ESP of +1.16%. The Zacks Consensus Estimate for the second quarter is $2.59 per share. In the past 30 days, estimates have inched up nearly 1.0%
 
Headquartered in Prides Crossing, MA, Affiliated Managers is engaged in providing investment management services to mutual funds, institutional clients and high net worth individuals across the U.S.
 
The company has registered an average earnings surprise of 7.1% in the trailing 4 quarters.
 
--Affiliated Managers is scheduled to announce its second-quarter results on Jul 29.
 
Fortress Investment Group LLC (FIG - Snapshot Report) is a Zacks Rank #3 stock with an earnings ESP of +17.65%. The Zacks Consensus Estimate for the second quarter is 34 cents per share. In the past 30 days, estimates have risen 61.9%.
 
Headquartered in New York, with additional offices across North America, Latin America, Asia and Europe, Fortress Investment is an alternative asset manager that raises, invests and manages both private equity and hedge funds. 
 
--Fortress Investment is scheduled to announce its second-quarter results on Jul 31.
 
Oaktree Capital Group, LLC (OAK - Snapshot Report) has a Zacks Rank #2 along with an earnings ESP of +6.90%. The Zacks Consensus Estimate for the second quarter is pegged at 58 cents per share. Over the last 30 days, estimates have advanced 13.7%.
 
Chicago-based Oaktree Capital is an investment management firm focused on alternative markets with specialization in credit and contrarian, value-oriented investing.
 
--Oaktree Capital is slated to announce its second-quarter results on Jul 31.
 
The Carlyle Group LP (CG - Snapshot Report) is a Zacks Rank #3 stock with an earnings ESP of +4.55%. The Zacks Consensus Estimate for the second quarter is 66 cents per share. In the past 30 days, estimates have risen 26.9%.
 
Based in Washington, with additional offices across North America, Latin America, Asia, Africa and Europe, Carlyle Group is an investment firm engaged in direct and fund of fund investments. 
 
The company has registered an average earnings surprise of 2.8% over the trailing 4 quarters.
 
--Carlyle Group is expected to announce its second-quarter results on Aug 6.
 
Looking Ahead
 
Geopolitical clashes (Russia-Ukraine and Israel-Palestine, among others) have been dominating headlines in the recent months. With the Malaysian Airlines civilian plane shot down last week near Russia-Ukraine border by the rebels, the issues further escalated. We believe that these issues will continue to hound the stock markets in the near term, leading to volatility in the U.S. indexes.
 
Nonetheless, the Securities and Exchange Commission (SEC) announced final rules related to money market funds on Wednesday. These will prevent investors from fleeing the $2.6 trillion money funds industry during a financial crisis. The rules require prime money market funds to float the value of their shares (instead of maintaining a NAV of $1 per share) and impose withdrawal fees. Though this will cause a further rise in compliance costs, the rules are aimed at stabilizing the sector, especially during the time of financial downturn.
 
Further, asset management stocks are expected to perform well in the forthcoming quarters driven by heightened demand for personalized investment solutions as well as rebound in the equity markets. Additionally, high shareholder return (in form of continued dividend payouts and share repurchases) is a bonus for these stocks.
 
 
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