Rate of Change Decelerating: BlackStone is a market leader in all four of its business lines and a well liked and respected company which make it a dangerous stock in our view. The core factors that drive shares are starting to decelerate with distributable earnings sourced by net accrued performance fees now declining which is forcing the stock down in lock step. We calculate to make the Street's estimates next year that BX will have to expend 74% of its year end 2016 accrued performance fees, almost double the 39% put out for distributions in 2016 and over 10 points more than the former high of 61% of accrued fees in 2014.
Big Data Points to a Hyper Cyclical: The causal factors of BX stock price and internal fundamentals point to a hyper cyclical stock with positive coefficients to all market indices, consumer confidence, and nonfarm payrolls. Negative betas are evident to corporate credit costs, the U.S. unemployment rate, and both equity and fixed income volatility. With the economy entering late cycle territory and the path of least resistence higher for both vol and unemployment trends, we think investors risk overstaying their welcome remaining long the stock compared to the growing risks of shares inflecting lower with the economy.
Earnings Quality Will Matter Again: The entire Alternatives group ranks poorly as Non GAAP accounting beneficiaries which make results look stronger than they really are. The entire earnings quality measure of the S&P 500 has been deteriorating since 2009 and is now back to the worse levels since 2007. The S&P 500 is now averaging a GAAP-to-Non GAAP ratio of 77%, which means that there is a -23% discount between adjusted and GAAP results. The Alternatives are much worse averaging a 59% ratio, or a GAAP discount of -41%. When the tide turns and investors look for safety in defensive stocks, we think the Alternatives group will fail to qualify for that category and will experience substantial declines on a flight to quality.
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Jonathan Casteleyn, CFA, CMT
Patrick Staudt, CFA