The all-equity asset manager is in a sweet spot, says the team, benefitting from strong market conditions, and Richard Pzena's (PZN +9.6%) deep value investing style which is generating "material excess returns, which could persist for three more years."
"Sales have rebounded, helped by endorsements by Vanguard and ABN Amro, better performance, and greater confidence in deep value investing. We also see material operating leverage, with costs more fixed than at peers."
The upgrade is to Buy with price target raised to $11 from $9.
'Skepticism about equity markets remains high," says deep-value investing giant Richard Pzena. Given the level of interest rates, the S&P 500 would have to rise by about 15% just to restore the historical equity risk premium. Put another way, the 10-year Treasury yield would have to rise to 3.8% vs. 2.5% today for the current level of the S&P to make sense.
Think the market should go down? By Pzena's calculation, the 10-year Treasury yield would have to jump to 5% to justify a S&P 500 10% lower than it is now.
What about value? Even five years since the end of the financial crisis, value stocks still have double-digit expected returns going forward if value spreads return to their norms, he says.
Richard Pzena (PZN) - still heavily overweight financials (XLF) and mature tech (XLK) - makes his case for global banks in today's earnings call (transcript): With capital levels of 11-13% at JPM, C, and BCS double what they were pre-crisis, will regulators allow banks to earn a decent return on said capital? A definite "yes," says Pzena, seeing no reason demand for financial products won't continue to grow faster than GDP, and noting bank managers' "laser-like focus" on improving returns. An average price-to-book ratio of 0.7x combined with a modest ROE of 12-13% suggests fair value more than double current prices.
Deep-value investor Richard Pzena (PZN) remains bullish on the big banks, calling their improved situation nowhere near reflected in their share prices. Big-cap tech is also a favorite as it's now investor habit to price these top-quality, cash-flow heavy businesses at a discount to the market. He notes finance and tech makes up 55% of his portfolio vs. 32% for managers identifying themselves as large-cap value.
Pzena Investment Management (PZN): Q4 EPS of $0.08 misses by $0.01. AUM of $17.1B, up from $13.5B a year ago, with market gains accounting for 75% of the increase. The firm is a large holder of DELL and CEO Richard Pzena opposes the LBO. The conference call is set for 10 AM ET tomorrow. (PR)
Macquarie adds to the drubbing in financials today after it downgrades a number of asset managers on a combination of deteriorating fundamentals and relative valuation: Legg Mason (LM -6.1%) is cut to Neutral, and Affiliated Managers (AMG -5.1%) and Pzena (PZN -6.6%) are both reduced to Underperform.