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Calamos Asset Management (NDQ:CLMS) Nov. 1, 2009 - $10.60

Dividend = $0.55 quarterly = 2.075% current yield

Calamos provides investment management advice and services to institutional and individual investors. The firm offers more than a dozen mutual funds and five closed-end funds, as well as separately managed accounts. Calamos has expanded its fund lineup to include equity, fixed-income, and alternative investments. Calamos Growth and Calamos Growth and Income--account for more than 40% of assets under management.

Both those flagship funds are performing very well this year with the Growth Fund up 39.2% and the Growth & Income Fund up 30.3% YTD through October [versus the DJIA’s + 10.7% and the S&P 500’s +14.7%]. Other Calamos open-end funds have gained above 28% this year and their closed-end funds have shown 52-week shareholder returns of 41.3% {CHY}, 42.2% {CHI}, 33.9% {CHW} and 57.8% {CGO}.

The shares of this fine money management firm were quite popular and highly valued prior to 2008’s market meltdown with typical P/Es in the 21 – 22x neighborhood. Earnings took a big hit last year but are recovering nicely as assets under management are rebounding.

Here are their per share numbers from continuing operations as reported by Value Line:

Year

Sales

C/F

EPS

Div.

B/V

Av. P/E

52-wk Range

2004

13.57

4.67

1.09

0.07

6.89

22.6x

19.40-28.35

2005

18.16

1.48

1.26

0.30

8.09

21.1x

20.55-32.81

2006

20.95

1.78

1.45

0.38

9.26

21.6x

24.23-44.10

2007

22.68

1.76

1.22

0.44

10.24

21.5x

20.08-34.61

2008

20.08

0.62

d.1.24

0.33

7.73

NMF

2.55-29.67

In the nine months ended September 30th EPS were $0.39 versus a deficit in 2008. Full year consensus 2009 – 2010 expectations now run $0.60 and $0.82 /share respectively.

That makes the forward P/E< 13x – well under the historical range since the 2004 IPO.

If the fine fund performances remain strong, I wouldn’t be surprised to see AUM increase dramatically and for estimates to get ratcheted up further. Note the high prices from each of the years 2004 – 2008 for the upside potential over the longer term.

At last week’s close of $10.60 these shares are trading at just over 1.3x the September 30th book value. CLMS has traded at 3 – 4x book value during each of the previous five years. Even twice book value would bring CLMS shares back to over $16 for a 50% move from the current quote.

The dividend yield of 2.075% is better than you can get on your money market or most bank CDs right now.

Morningstar takes a conservative view with a ‘fair value’ estimate of $12 /share. I’m much more bullish than they are but even their target would bring a 13.2% gain on top of the dividend for a > 15% one-year total return. Calamos shares actually closed at $14.83 on July 23rd and at $14.14 as recently as October 15th.

I was a big buyer of these shares last fall when they were ridiculously cheap. I lightened up when the shares hit $15 and now I’m buying again expecting at least $15 - $16 over the next 12 months.

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Calamos has options but they are quite thinly traded with wide bid-ask spreads.

Here is a nice trade that should be available with limit orders…

Cash Outlay

Cash Inflow

Buy 1000 CLMS @ $10.60 /share

$10,600

Sell 10 May $12.50 calls @ $1.20 /sh.

$1,200

Sell 10 May $12.50 puts @ $3.00 /sh.

$3,000

Net Cash Out-of-Pocket

$6,400

If Calamos shares bounce back to at least $12.50 (+ 18%) by May 21, 2010:

  • The $12.50 calls will be exercised.
  • You will sell your shares for $12,500.
  • The $12.50 puts will expire worthless.
  • You will likely have collected $165 in dividends.
  • You will have no further option obligations.
  • You will end up with no shares and $12,665 in cash.

That best-case scenario would show a total profit of $6,265/$6,400 = 97.8% achieved in just over 6.5 months on shares that only needed to rise by 18% or more.

What’s the downside?

If Calamos shares are< $12.50 on May 21, 2010:

  • The $12.50 calls will expire worthless.
  • The $12.50 puts will be exercised.
  • You will be forced to buy another 1000 CLMS shares.
  • You will need to lay out an additional $12,500 in cash.
  • You will likely have received $165 in dividends.
  • You will have no further option obligations.
  • You will end up with 2000 shares and $165 in cash.

What’s the break-even point on the whole trade?

On the first 1000 shares it’s their $10.60 purchase price less the $1.20 /share call premium = $9.40 /share.


On the ‘put’ shares it’s the $12.50 strike price less the $3.00 /share put premium = $9.50 /share.


Your overall break-even would be $9.45 /share (ignoring yield) or $9.37 /share (including the expected dividends).


CLMS could fall by up to $1.23 /share (-11.6%) without causing a loss on this trade.





Disclosure: Author is long CLMS shares and short CLMS options.

Source: Calamos Asset Management: Undervalued