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FAITHFULLY TRACKING THE daily market action in this overheated, underwhelming summer is like avidly rooting for a mediocre baseball team. Each day brings victory or defeat, sometimes dramatic, but the team never gets out of the middle of the pack or, in market terms, this stubborn trading range.
With individual investors and many traditional fund managers waiting out a self-imposed benching amid the mixed signals, the action is left to faster-moving professional traders, for whom each trading session starts with the score 0-0 and the main objective simply to "win the day."
Not many technical market analysts can write deftly, but William Gibson, who offers a weekly market take at http://mrmkt.wordpress.com, is an exception.
Last Tuesday, he wrote that after the bears took the flag in the last half of June, they couldn't buckle the market. So now "there's barbed wire strung along the front lines, [between] the bounce-back high ended June 21 and the July 1 low, mixed technical indications in between, intermingling with land mines, high-frequency trading and untold graves, willing volunteers on either side, myopic bulls with little conviction ignoring the 24,000-pound elephant (a government spending over $30 billion a week it doesn't have) and the bears, too bold for my liking, at least those poking their heads up for the press, wounded as well, chopped up by their own deserters in a contrary market lacking momentum."
Not a bad color commentary.
Just how stuck are we? Friday the Dow Jones Industrial Average and Nasdaq Composite closed about as flat as indexes can after nearly seven months of the year, the former down 0.03% and the latter up 0.01%.
If forced to guess, most casual observers would likely say the market was down a fair bit more for 2010, so wearying has been the ride. All else being equal, worry that exceeds the facts or the market's action would usually be a positive, particularly when Europe has calmed down and the noise of government policy risk has likely climaxed. (Note: Congress goes on recess Aug. 9).
THE LISTING ON THE New York Stock Exchange this month of the common partnership units of KKR & Co. (ticker: KKR) generated a mere fraction of the attention attending the initial stock offering of its private-equity peer Blackstone Group (BX) in mid-2007, which Barron's cover properly designated the "Top of the Market" for the last easy-credit leveraged-buyout cycle (June 25, 2007).
Yet some value-attuned hedge-fund managers (without, as yet, the aid or hindrance of much sell-side analyst coverage) are dissecting KKR's business in a way that makes it look undervalued. KKR debuted at 10.50, and has traded down from there, in part due to some apparent technical selling by investors unable to exit the stock when it was listed in Europe. It closed Friday at 9.50.
KKR ran $55 billion in assets across a variety of strategies as of March 31. Simply valuing the management fee stream from these assets at a 15 price-to-earnings multiple, in line with other money managers, and placing a lower multiple on its capital-markets unit, yields $3.25 or so per share in value, fully taxed. Adding the straight book value of its private and public direct investments produces another $6.25 per share, for a total implied value of $9.50, right at the present share price.
The next trick is valuing potential future performance fees on the $27 billion of deals housed in its private-equity funds, as well as those of deals not yet done and funds not yet raised.
One hedge-fund manager who has been buying the stock pencils in as plausible an 8% annual gain in the private funds, calculates the present value of the resulting performance fees (or the 60% of performance fees that flow to shareholders after employees get their taste) and gives this line item a 10 multiple to arrive at $3.70 a share in value. That produces a total sum-of-the-parts target above $13, more than 35% above the current price.
Analysts at Keefe Bruyette & Woods go even further, figuring KKR's operating business to be worth $9 to $11 per share and the private-equity portfolio worth another $6.22 atop that, for a total value between $15.22 and $17.22.
The same exercise performed on Blackstone shows its shares trading right at estimated fair value near their latest price of 11.25. Granted, Blackstone arguably has a more diverse business mix. But it also has a far greater exposure to commercial real-estate investments, most made at dear valuations. KKR has expressed an intention to raise more equity publicly, but is likely to wait for a higher market price.
Expect a flight of additional sell-side analysts to initiate coverage of KKR soon, most spotlighting the unrecognized absolute and relative value offered by the shares.
Email: michael.santoli@barrons.com
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