The Fundamentals

Drama. Mr. Schwarzman, the co-founder of The Blackstone Group LP which paid him about \$90 million in salary last year, is complaining that the stock market is undervaluing his company and that the stock is “worth” nearly twice the \$27 that it’s trading for today. And woe be unto him because he invited us to “do the math” (Bloomberg, July 21, 2016, Blackstone’s Math Lecture).

We’ll get to the “math” part in a moment but we have to wonder why a company that is trading at [P/E] 155x earnings right now at \$27 per share should be trading at 310x earnings even if the earnings jump-up a bit, as Mr. Schwarzman is predicting.

What he’s saying, basically, is that the \$1 that I’m holding in my hand right now is worth only 1/3 cents to me as an “investment” but a whole \$1 to him; or to put it another way, if I give \$3,000 to Mr. Schwarzman today by buying the stock of his company, then I should be able to spend about \$1 million, sometime soon, I hope.

Equation 1: The Return on the Shareholders Equity

But my chart says that Mr. Schwarzman is only earning 2.5 cents on every dollar that he “owns” in his company; that is, the return on the shareholders equity (ROE) for his company is only 2.5% and that’s a lot less than the \$300 that I was hoping for by buying his stock; please see Equation 1 on the right (and click on it and again to make it larger as required).

According to Mr. Schwarzman’s “New Math” (ibid Bloomberg) we should be willing to pay for his skill at increasing the fee revenue that he’s earning from all of the investments that he manages for other people, the limited partners.

But in order to earn fees on performance, there has to be performance and the extraordinary decline in net earnings (in Equation 1 above) for the company in the face of an extraordinary increase of the assets under management (AUM) suggests that the “performance” part hasn’t really taken off yet.

Equation 2: Good Value Index (GVI)

Moreover, although it’s true that investors are paying less today for the company’s equity than they did in 2014, for example, it’s not so much less that we should be expected to pay nearly twice the current stock price even though the price has dropped about (7%) since December; please see Equation 2 on the right for more of the meaning of that.

It appears, then, that we’re currently paying way too much for an interest in the earnings of this company and that we’ve already paid for the current dividend yield of 9.2% and a payout of \$3.3 billion which is 15x what the company earned last year.

Nevertheless, despite our equations, the stock market is currently “bullish” on the stock; we’re not buying right now but we know what we’re waiting for; please see Exhibit 1 below.

Exhibit 1: (B)(N) BX The  Blackstone Group LP – A Stock Chart, a Ruler, and a Good Eye

For more examples of the (B)-class portfolio in difficult markets, please see our recent Posts on”The “W” Syndrome“, Steel,  Green Energy and The Coal War; and the Canadian Mines have also taken-off – please see our recent Post “(B)(N) Extreme Economics – The (New) Canadian Mines” for a heads-up on that.

And for more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

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For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.