THE HEDGEYE EDGE
Rate of Change Decelerating: Blackstone Group (BX) 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.
That is forcing the stock down in lock step.
We calculate that in order for BX to make the Street's estimates next year the company will have to expend 66% of its year-end accrued performance fees. That would be more than 20 points higher than the balance expended for 2016 distributions and above the all-time high of accrued fees paid out in 2015.
Big Data Points to a Hyper Cyclical: The causal factors of BX's 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 resistance higher for both volatility and unemployment trends, we think investors risk overstaying their welcome by remaining long the stock compared to the growing risks of shares inflecting lower with the broader 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. Let's review:
- The entire earnings quality measure of the S&P 500 has been deteriorating since 2009 and is now back to the worst 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.
Fair Value? Our base case valuation for BX shares is $20, or ~25% downside from current levels with a $15 per share valuation in our Bear case scenario, or -40% downside.
**Click the image above to watch an excerpt from Financials analyst Jonathan Casteleyn's short call presentation for institutional clients.
ONE-YEAR TRAILING CHART
