ARES - Ares Management: Best Nearby Asset Manager Cap-Gain Stock Prospect

2023-03-29 18:22:04 ET

Summary

• “Best” of dozens of options, based on stock price change outlook seen by the pro market-making community as they serve their big-$ institutional investment clients managing multi-billion-$ portfolios.
• The MM community arranges multi-thousand share trades among “institutions” by buying price-change-risk insurance to protect their firm’s capital temporarily risked to match buyer with seller share volume.
• There, the costs and structures of such hedging in “derivative securities” markets tells the stock’s outer-price-limits likely in the next few months seen by well-informed players betting big-$.
• Subsequent past 5-year market-price history tells how well (odds) those limits have been foreseen at prior times which looked like the Risk~Reward balance seen now.

The primary interest of this article is Ares Management Corporation ( ARES )

Investment Theme

The focus of this information-technology-centered software/service company is on the professional investment industry itself.

As has been indicated in prior articles, Market-Maker risk-avoidance requirements continually drive derivative market prices (even including this one’s), revealing the coming price range expectations of professionals. They are informed by over 100,000 world-wide wide-eyed and –eared MM employees on a 24x7x365 watch for change in competitive circumstances. Which get immediately communicated to the home-base trading desks – principal customers of ARES.

Following an unchanging risk-minimizing portfolio management discipline, records can be kept of how insightful the maintained intelligences flow has been on ARES and each of thousands of subject stocks over decades of daily observations.

Description of our company of interest

“Ares Management Corporation operates as an alternative asset manager in the United States, Europe, and Asia. The company's Tradable Credit Group segment manages various types of investment funds, such as commingled and separately managed accounts for institutional investors, and publicly traded vehicles and sub-advised funds for retail investors in the tradable and non-investment grade corporate credit markets. Its Direct Lending Group segment provides financing solutions to small-to-medium sized companies. The company's Private Equity Group segment focuses on majority or shared-control investments primarily in under-capitalized companies. Its Real Estate Group segment invests in new developments and the repositioning of assets, with a focus on control or majority-control investments; and originates and invests in a range of self-originated financing opportunities for middle-market owners and operators of commercial real estate. The firm was previously known as Ares Management, L.P. Ares Management Corporation was founded in 1997 and is headquartered in Los Angeles, California with additional offices in the United States, Europe and Asia. Ares Management GP LLC is the general partner of the company.”

Source: Yahoo Finance

These estimates come from less-intense general “street analyst” estimates made across hundreds or more subject companies, usually without specific things of value resting on the estimates offered.

What Are the Present Opportunities?

Figure 1 compares the prices and price-range extremes likely of Information Technology-provider stocks at this point in time, now that the Covid-19 pandemic has become relaxed as to voluntary home quarantining.

Figure 1

(used with permission)

The trade-offs here are between near-term upside price gains (green horizontal scale) seen worth protecting against by Market-makers with short positions in each of the ETFs, and the prior actual price drawdowns experienced during holdings of those ETFs (red vertical scale). Both scales are of percent change from zero to 25%. Desirable locations are down and to the right.

The intersection of those coordinates by the numbered positions are identified by the stock symbols in the blue field to the right. The ‘market-average” notion SPDR S&P 500 Trust ETF ( SPY ) at location [10] provides a sense of trade-off norms. ARES at [2] is our principal focus.

The dotted diagonal line marks the points of equal upside price change forecasts derived from Market-Maker [MM] hedging actions, and the actual worst-case price drawdowns from positions that could have been taken following prior MM forecasts like today’s.

This map is a good starting point, but it may only cover part of the investment characteristics that often should influence an investor’s choice of where to put his/her capital to work. Other considerations are indicated in Figure 2.

Figure 2

(used with permission)

The likely price range forecast for our subject of the moment, ARES, is in columns [B] and [C] with its current price in [D]. [E] tells the upside size of a price move [B] from [D]. The Range Index [G] measures the downside proportion of the whole [C] to [B] range lying between [D] and [C]. That proportion is reported in [G] as a % may be looked at as a potential forecast-risk “cost” of owning or being “long” the subject.

We use the Range Index as a perceived Reward~Risk gauge of coming near price extremes to assemble a sample of prior expectations among institutional investors and their professional agents, the Market-Makers. With a statistically-significant number of prior expectations a comparison of the subject investment candidate of the moment can be made to itself, historically, and used as a normalized projection of how often such prior projections became profitable outcomes in the sample [L] from the available 1261 forecast days [M] of the past 5 years.

In addition to the “Win odds” of [H] we can know the average size [ I ] of the net win and loss payoff outcomes of all [L] forecasts and use it in comparison to the comparison of the current [E] upside potential maximum likely price gain prospect [E]. That [E] vs. [ I ] ratio we regard as the “Credible ratio” shown in [N]. Because [ I ] usually includes some loss experiences [N] typically is less than 1.0, but anything less than .70 is not encouraging.

A more universal “figure of merit” [fom] is obtained by win~loss odds weighting of [ I ] and [F] in [O] and [P] to get a net risk-adjusted reward [Q]. Recognizing the power of time in compounding, [Q] is adjusted by [J] to get the fom [R]. It is the potential “basis points per day” of return on investment from the current forecast.

Here that number for ARES is 53.7, which calculates to a CAGR of +243%. Compared to the current MM community expectations for the S&P500 index ETF at 0.1 of 10% CAGR that is excellent. And compared to the 2,964 forecast population outlook for less than -6 bp/day it is night and day.

Recent trend of MM Price Range forecasts for ARES

Figure 3 provides picture and analysis data of the past 6 months trend of MM daily price range forecasts. The vertical lines are forecasts, NOT “technical analysis” of past market actions. Each day’s range forecast is split into upside and downside prospects from the close price of the day of the forecast.

This has not been an encouraging period for ARES and its investment management industry group, but the turn of market professionals for the better now appears to be under way.

Figure 3

(used with permission)

Now the ARES Range Index of 0, with a Reward-to-Risk ratio of 3.1 to 1, is very attractive compared to most else in Figure 2’s column T. And its prior 5 year experience of 23 profitable position forecasts out of 23, with a net profitability of all at +18.8% in 35 market days suggests a +243% CAGR.

Conclusion

We believe that Ares Management, Inc., better than other investment management stocks, will blossom well in the next 7-8+ weeks. Then earlier opportunity experiences of high rates of capital gain will likely be revisited.

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