2023-09-24 08:30:00 ET
Summary
- BlackRock stock has underperformed the S&P 500 significantly since my previous caution in January 2023. It has sold off further recently as investors braced for a higher-for-longer Fed.
- However, BLK is no longer overvalued. As such, investors who missed buying earlier in 2023 are afforded another opportunity to board.
- BlackRock's market leadership as the world's largest asset manager has proved its resilience during last year's bear market. Its platform strategy also helps diversify its earnings drivers.
- I argue why it's finally time for me to revise my rating on BLK, urging holders to add more exposure.
I last updated BlackRock ( BLK ) investors in January 2023, urging them to consider staying on the sidelines as BLK's valuation looked too pricey. Accordingly, my thesis has panned out as BLK has significantly underperformed the S&P 500 ( SPX ) ( SPY ) since then. However, I'm aware that the world's largest asset manager has a wide-moat business model with a massive scale, leading to unparalleled market leadership.
BlackRock dip-buyers who capitalized on its steep plunge amid the throes of the regional banking crisis have not given up their positions. Interestingly, while BlackRock reported a robust second-quarter or FQ2 earnings release in mid-July, BLK also topped out the following week, as dip buyers likely sold the news astutely as it surged toward its July highs ($757 level).
With BLK dropping back to levels last seen in early June (a decline of nearly 13%), I believe it's apt for me to assess whether buyers who missed adding earlier this year should capitalize.
Keen investors should be keenly aware that the Fed's "hawkish pause" at its September FOMC meeting intensified the selling pressure in the market. Most sectors were sold off, particularly risk-on sectors such as tech ( XLK ) and consumer discretionary ( XLY ). Market operators have quickly adjusted to a higher-for-longer Fed, given the upward revisions in the committee's median Fed Funds rate forecast for 2024.
As such, investors shouldn't be stunned that BLK also fell this week, given its AUM exposure linked to the performance of equity markets. I believe investors are likely pricing in higher execution risks in the second half, even as the asset manager delivered a robust first-half total net flow of $190B, including $80B in the second quarter.
BLK Quant Grades (Seeking Alpha)
However, BlackRock's best-in-class "A" profitability grade should proffer significant downside protection on its earnings visibility. Furthermore, I believe last year's bear market has proved the resilience of BlackRock's operating margins, as it remained well above 30% and is expected to improve further.
Moreover, the asset manager's platform focus is well-primed to leverage diverse strategies in fixed-income and alternative assets, helping to mitigate the equity market cycle risks. Notwithstanding its diversification, BlackRock is exposed to cyclical downswings. However, such near-term headwinds are fantastic opportunities for high-conviction investors to gain further exposure, even as weak holders flee.
BLK is still priced at a relative premium against its asset management peers, assigned a "D-" grade. However, BLK's forward adjusted P/E multiple has normalized to 17.6x, slightly below its 10Y average of 18x. In other words, I assessed that BLK is no longer overvalued.
Furthermore, analysts' estimates suggest BlackRock's adjusted EPS is expected to increase at a 3Y CAGR of about 10% from FY22-25, suggesting significant reacceleration from FY23's 0.9% projected uptick. Given the recent pullback, it has opened up a more attractive risk/reward profile to partake in BLK's medium-term earnings recovery.
BLK price chart (weekly) (TradingView)
To be clear, I have not gleaned a validated bullish reversal from this week's selloff. As such, there's a possibility that sellers could intensify the decline, taking it as far down as BLK's March lows ($620 level) before bottoming out.
Therefore, more conservative investors can consider awaiting more favorable price action before pulling the buy trigger. Otherwise, it's also possible to consider allocating an initial exposure to the current levels and averaging down, if necessary, to take advantage of another potential selloff.
Notwithstanding the caution, I anticipate buyers returning between these levels to defend BLK's March lows. As such, I assessed that BLK's risk/reward profile has improved markedly, allowing me to be more constructive in my thesis.
Rating: Upgraded to Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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BlackRock: Pivotal Buying Moment Is Finally Here (Rating Upgrade)