2024-01-09 13:30:00 ET
Summary
- BlackRock is the world's largest asset manager with diverse asset classes, allowing it to capture potential upside and mitigate risks across several themes.
- The company sees lucrative opportunities in private markets and aims to be a "structural grower" to capture these opportunities for its overall portfolio.
- BlackRock is well-positioned to benefit from the reallocation to fixed-income strategies as investors react to a more dovish Fed.
- However, if you waited till now to consider a position in BLK, the most attractive opportunities are likely gone.
- I argue why investors shouldn't go FOMO now and chase further anticipated upside in BLK at the current levels, as BLK isn't a Buy at any price.
My bullish thesis on BlackRock, Inc. ( BLK ) is simple. It's the world's largest asset manager with AUM that grew 14% YoY in the third quarter or FQ3 to $9.1T. It has diverse asset classes across several themes and strategies, allowing BlackRock to capture potential upside and mitigate risks. As a result, it can leverage its wide-moat business model to expand its capabilities in equities, fixed income, multi-asset strategies, and " growth in private markets."
Private markets have gained increased traction, given the 2023 banking crisis that hobbled lending and investment in the private markets space. As a result, it has opened up more attractive opportunities for alternative asset managers like Blackstone ( BX ), particularly in private credit, as I highlighted recently.
Even for the more traditional asset managers like BlackRock, the firm sees a lucrative opportunity to partake in the segment, aiming to be a "structural grower and maintain relevance in serving whole portfolios." As a result, BlackRock sees the ongoing industry consolidation and market expansion as beneficial for its strategies.
In addition, the company has confidence that the anticipated Fed rate cuts this year should spur a reallocation of cash to fixed-income strategies as investors attempt to lock in attractive price levels. BlackRock highlighted that the Fed's unprecedented rate hike campaign since 2022 led to investors taking more time to reassess their cash allocation. CEO Larry Fink stressed that "for the first time in nearly two decades, clients are seeing real returns on cash investments." As a result, these investors bided their time on a strategic reallocation, "leading them to wait for more certainty in policy and market conditions."
BlackRock's global chief investment strategist Wei Li accentuated that 2024 offers investors " heightened rewards for active engagement in the current financial environment." In addition, she articulated that investors should avoid "extended holding of cash," encouraging investors to return to the high-quality selections in asset classes. As BlackRock highlighted, the optimism is justified: "$8.3T still sitting in money-market funds."
BlackRock's prowess as the world's largest asset manager allows the firm to benefit from secular growth opportunities, such as in the private markets, increasing its fee base. It also facilitates the AUM increase from the sharp cyclical recovery in the equity markets, as the S&P 500 ( SPX ) ( SPY ) fell to peak pessimism in October 2023 before bottoming out. In addition, BlackRock is well-positioned to leverage the reallocation to fixed-income strategies as investors react to a more dovish Fed over the next two years.
Notably, BlackRock benefits from its ability to capitalize on its massive scale efficiencies and industry consolidation, as it anticipates an ongoing "consolidation trend among clients working with fewer providers." Therefore, it's challenging for smaller competitors to replicate BlackRock's market leadership, backed by a robust "A-" profitability grade. In other words, I assessed BLK as a rock-solid opportunity for investors to consider buying whenever significant dips are assessed. What about now?
With BLK's forward adjusted earnings multiple surging above the 21.5x level, it's markedly higher than its 10Y average of 18.1x. As a result, I gleaned that much of its near-term upside has likely been reflected, suggesting the risk/reward is much less attractive to add aggressively at the current levels.
BLK price chart (weekly) (TradingView)
BLK's price chart indicated a bull trap ( false upside breakout ) occurred as it topped out in December 2023. The market is expected to shake out late buyers who chased its December surge before consolidating more constructively.
I welcome a shake-out, as it should help dissipate some of the recent over-optimism seen in BLK's price action and less attractive valuation. Being the world's largest asset manager, I can understand the market's optimism, suggesting BlackRock is anticipated to post much more robust performances in 2024.
However, investors must always consider that the market is forward-looking. If you missed buying BLK's peak pessimism in October 2023, as the market shook out the weak dip-buyers, you likely wouldn't get another better chance unless we are expected to fall into a hard landing (which isn't my base case).
Hence, it's time to be patient as we await another more attractive entry point to help us outperform the market consistently. Consequently, I consider my bullish thesis as having played out accordingly.
Rating: Downgraded to Hold.
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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For further details see:
BlackRock: World's Largest Asset Manager Isn't A Buy At Any Price (Downgrade)