OWL - Blackstone Stock: 3 Reasons To Sell It Right Now

2023-09-26 09:00:00 ET

Summary

• Blackstone stock has delivered strong returns and has $1 trillion in assets under management.
• That said, we believe that there are three compelling reasons to sell the stock right now.
• We also discuss what we would do with the proceeds from selling BX stock.

Blackstone ( BX ) stock has delivered wonderful total returns for shareholders over the long term, easily surpassing those generated by the broader stock market ( SPY ) as well as many of its peers:

Moreover, the company now has $1 trillion in assets under management, making it the world's largest alternative asset manager and it continues to grow. In its latest quarterly report, management highlighted that its assets under management increased by 6% year-over-year and that further growth is likely in store thanks to having strong fundraising momentum in:

private credit and insurance, infrastructure globally, energy transition, life sciences, the development of the alternatives business in Asia, and the private wealth channel, where the democratization of alternatives is in its early stages.

Its sizable position in numerous sectors including private equity, direct lending/private credit, real estate, and infrastructure provides it with competitive advantages that many of its smaller peers can only dream of at this point, including economies of scale, a low cost of capital, a stellar brand that gives them access to the top institutional investing clients in the world, superior deal flow, and a vast treasure trove of proprietary industry-level and macroeconomic data.

As recently as June 13th, we felt that BX stock was attractively priced and even penned a piece titled: Blackstone Stock: 3 Reasons Why It Could Crush The Market . Since then, our thesis proved correct, with the stock crushing the broader stock market over those three and a half months:

Now, however, we no longer feel like BX stock is a compelling buy and in fact believe that investors would be better served by selling the stock and reinvesting the capital elsewhere. Here are three reasons why:

#1. Macroeconomic And Geopolitical Fundamentals Are Increasingly Bearish For BX Stock

BX's business has benefited from three major tailwinds while building its global alternative asset management empire:

• Overall favorable capital market conditions have given it access to low-cost capital. As a result, it has aggressively grown its share count and opportunistically issued debt, using the proceeds from these capital raises to make accretive investments in growing its business. This has helped to deliver the enormous economies of scale, data, brand power, and deal flow competitive advantages that it enjoys today.

• Historically low interest rates have not only created a very attractive cost of capital for the company (see point one above) but have also driven very strong appreciation in the assets that it manages. As a result, clients have been thrilled with the returns on their investments - fueling strong assets under management growth - and BX has also raked in lucrative performance incentive fees on its funds.
• The global economy has boomed over the past several decades, fueled by globalization, low interest rates, low inflation, technological innovation, and relative peace among the world's major powers with few interruptions to the flow of goods and services around the world at an ever more efficient pace.

Unfortunately for BX, each of these tailwinds is in the process of coming to an end, potentially for the foreseeable future:

• While BX's stock price remains attractive at the moment, interest rates have soared and even BX's stock price has faced considerably greater volatility over the past year, providing a less stable environment for growing shares outstanding until just recently:

• BX's underlying assets are facing considerable intrinsic value pressure given the rapid rise in interest rates. In particular, BX's large and leveraged real estate and private equity holdings are facing valuation multiple challenges. The severe challenges facing publicly traded REITs ( VNQ ) are clear evidence of the issues facing the real estate sector right now and publicly traded private equity firms like Brookfield Business Partners ( BBU ) reflect similar negative sentiment in the private equity space:

• Moreover, client unease has grown, including over BX's very large private REIT, which had billions of dollars pulled out of it by wary investors this past year.
• The global economy is now facing numerous challenges, with both Europe and China facing apparent severe economic difficulty and the U.S. far from being out of the woods of its inflation fight.
• Last, but not least, the future of global peace and prosperity is being threatened by growing deglobalization , the Russia-Ukraine war, and the growing risks of war in East Asia involving the Korean Peninsula and/or the Taiwan Strait. All of these current/potential military conflicts could potentially escalate to involve nuclear weaponry as well and - should the U.S. and China become engulfed in a hot war and/or the flow of semiconductors from Taiwan to the rest of the world be cut off, immense economic damage would likely result for the global economy. Given that Blackstone has a fairly substantial presence in China, such a development would have an outsized impact on them as well.

#2. BX's Valuation Is No Longer Attractive

Another reason why BX stock is no longer a buy is because its valuation is no longer particularly attractive in our view.

Its NTM dividend yield is only 3.9% and its price to NTM Distributable Earnings has ballooned to 22.3x, both of which are unattractive relative to any sort of historical average for the company:

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