Cohen & Steers (CNS, $28.25): Steering Clear into 2016
By: Ryan Johnston, AIM Student at
Marquette University
Disclosure: The AIM Equity Fund
currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
•
Cohen & Steers. (CNS) operates
as an investment manager in the United States and internationally. The company
focuses on global real estate securities (REITs), global listed infrastructure,
real assets, large cap value stocks, and preferred securities.
•
Well, it finally happened - the U.S. Federal Reserve moved interest rates up. So what happened with REIT performance? On the day Fed Chair Yellen
announced the increase, the REIT index jumped 2%; but over the last twelve
months the index is down approximately 6%, which is in-line with the S&P
500’s performance. Overall, REIT performance has not been punished because of
solid fundamentals.
•
I had some concerns over Martin Cohen toning down his role at Cohen &
Steers. So far he has remained a visible company and industry leader. While it
sounds like he is enjoying semi-retirement, Bloomberg and The New York Times
have interviewed him on the state of the REIT environment. Mr. Cohen has not
sold any of his 25% approximate stake in the firm, which is always reassuring.
•
Cohen & Steers has conquered REITs, what about real assets? In the firm’s
third quarter conference call, Mr. Steers indicated a large portion of the
firm’s focus would be on real assets. The goal is for the firm to be considered
a master of the real assets space, much like it is with REITs. There is one
huge, real issue blocking their way and that is performance. Real asset
strategies across the board have struggled, leaving investors with very little
incentive to jump on board. If the underlying investments of real asset
strategies begin to rip, I would expect their AUM to quickly follow suit.
Cohen & Steers. (NYSE:CNS) Since initiating coverage on Cohen
& Steers during mid-November 2015, fundamentally not much has changed at
the firm level. The largest change comes from their AUM flows. As of November
30, AUM decreased to approximately $52 billion; this change was expected
because of market conditions. Generally, $600 million in market depreciation
was the leading contributor to the decline, as well as an institutional decline
of almost $100 million, which was offset by retail investors in open-end mutual
funds with an increase of $120 million.
While
the firm does not provide color on the origin of strategy inflows and outflows,
I believe the open-end mutual fund inflows were into preferred securities. Over
the past few quarters, there has been an increase in popularity of Cohen &
Steers’ preferred securities fund because of their high-yielding nature and
increasing coupon rates. While this may sound counter intuitive to an astute
investor, the reason is because a large portion of preferred securities are issued by banks, who stand to benefit from a rising rate environment. Also, a
large portion of preferreds are fixed-to-floating rate securities, meaning as
interest rates rise, so do their coupon payments. This product popularity is
exciting for the firm and may help organically increase AUM over the next few
years so long as rates continue to rise.
Lastly,
going into 2016, I am going to be keeping a close eye on AUM growth,
particularly growth stemming from real asset strategies. If Cohen & Steers
were to experience any real and meaningful growth it would be from this asset
class. Real assets, like REITs, will never be a large allocation of a typical
diversified portfolio, but it does play an important role. That is why if
performance of the underlying investments were to begin to increase, the
popularity of the product will increase as well. Cohen & Steers has
everything in place including a great team, sensible investment philosophy and
process, and leading asset class research, all they are waiting and hoping for
is performance.
What has the stock done lately?
Since
the Domestic AIM fund initiated coverage, the stock has remained in a
relatively tight trading range of $28-$31. Recently the share price has slid
due to weaknesses in global markets. As I have stated before, there has been no
new information disclosed besides what was released in December regarding
November’s AUM. Management has not yet released the date for fourth quarter
earnings.
Past Year Performance: Looking back to the beginning of 2015,
the stock had a very rough year with a 33% decline, which after constructing a
DDM and P/E multiple, shows the firm is trading at a 39% discount. Overall, I
believe the share price is depressed because of investors’ knee jerk reactions
that interest rates will negatively affect the company’s fund performance.
Underlying that assumption is the Fed gradually raising interest rates over the
next few years. I believe these assumptions are totally within reason and
should be fully baked into the stock price in the next two to three years.
My Takeaway
As
the monthly chart below shows, while CNS has fallen, this stock's performance is in line with the Russell
2000 during the past four weeks. I would expect the stock to perform above the financial sector benchmark for the remainder of 2016.
As
I see it, this is a simple ‘value with a catalyst’ play. While there are
exciting new and growing products like real asset and preferred security funds,
the stock is simply undervalued to its competitors and historical average. None
of their products have been impaired and have demonstrated relative resilience
during all market cycles. This demonstrates to me that the firm is on a stable
foundation to continue their modest growth trajectory, by offering unique,
industry leading products and having a sticky investor base. Because of aforementioned
catalysts, I believe this stock has a 39% upside, with very little downside due
to the firm’s mature nature in the asset management industry. I strongly
encourage you to read my original
write-up posted on November 13th, which will provide more clarity and
background on my investment thesis and thoughts.
Source: Yahoo Finance
