Six Reasons to Love Sanders Morris Harris Group

Apr.30.07 | About: The Edelman (EF)
Sanders Morris Harris Group (SMHG) is a niche holding company based in Texas, that provides a variety of financial services- asset and wealth management, financial planning, investment banking/private equity and fixed income services.

Their "assets under management" has grown to over $13 billion from $3.2 billion back in the year 2000. I own some shares of SMHG for long term investment. Here are some of the reasons I like it:

1) SMHG has been following a "roll-up" strategy where they acquire highly successful independent financial advisor practices. Many of these advisors would prefer to "hand over" most of the administrative responsibilities to a larger firm and diversify their investment. This is similar to what Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) has done.

In late 2005, SMHG acquired 51% of Edelman Financial Center and they plan to buy the remainder in 2008 and 2009. Edelman was one of the fastest-growing privately-held financial planning firms in the country. Ric Edelman, the founder, is a leading advocate of financial literacy, and hosts a popular weekly radio program that started in the Washington DC area. Edelman's market reach is now much bigger since the program has been nationally syndicated.

I heard his program recently (I live on Long Island) and thought it was quite good-higher quality information provided than someone like Suzy Orman or even Bob Brinker. Ric Edelman is included in Barron's 2007 List of Top 100 Financial Advisors which was just published today. As of December 31, 2006, Edelman had more than 7,600 clients and $3.2 billion in assets under management.

Almost all of the advisors on Barron's Top 100 list focus on the high net worth market (over $1 million), but Edelman has built his business on the growing "mass affluent" market with an average net worth of about $400K. The mass affluent market is expected to grow rapidly over the next 15 years and is not as competitive as the high or ultra-high net worth markets.

2) SMHG also owns Cummer/Moyers, a No. 1 ranked firm in 2005 and 2006 by Nelson’s World’s Best Money Managers.

3) Many cross-selling opportunities. For example, their high net worth, mass affluent, and institutional clients have access to securities offerings developed by their investment bankers. They can also provide asset and wealth management products to executives of their investment banking clients.

4) I think SMHG may be an acquisition target of a larger firm like Schwab or Fidelity who are trying to build up their wealth management business. I did not see ANY Schwab or Fidelity advisors on Barron's Top 100 list.

5) Great Balance sheet- $153 million in cash/securities. Yahoo! lists their market cap at $309MM, but Enterprise Value is only $158 MM.

6) Average analyst estimates were raised to 0.79 about 30 days ago, so next years PE ratio is quite modest. Price/Book of 1.36 also seems too low for a company of this quality.

SMHG 1-yr chart: