Stock markets have been suffering from the winter blues so far this year. In particular, US stocks haven’t experienced a January quite like this one since the financial crisis over a decade ago. It hasn’t been great for FTSE shares either. Some large-cap companies have managed to eke out gains, but the FTSE 250 is down by almost 6% this year as I write.
I’ve found a stock that I think has been oversold. It’s a quality company that I’ve had on my watchlist for a while. Luckily for me, the recent market volatility has made the stock 25% cheaper today. Let’s take a closer look at the investment case.
A quality FTSE company
The company I think has been oversold is Liontrust Asset Management (LSE: LIO), a financial services company offering a range of investment solutions. At the start of the year the shares were £22. But today, the share price has fallen to £16.50. That’s a 25% drop!
Liontrust did release a trading update on 17 January. I don’t think this was the reason for the fall, though. Indeed, the update confirmed that net investor inflows and assets under management and advice (AuMA) all grew. This all looks good to me.
One of the reasons I like the company is the experienced investment management teams it has. This has translated into many strongly performing funds for Liontrust over the years. I think this would be very hard for a competitor to replicate. So to me, it’s a strong competitive advantage and a sign of a quality company.
Liontrust has exceptional growth forecasts too. Earnings per share are expected to rise 42% in the period to 31 March 2022, and by 14% in the following 12 months. The dividend yield is expected to rise from 3.9% to 4.5% over this period as well. That’s an attractive income for my portfolio with earnings per share growing at such a good rate.
What are the risks?
I’m pretty sure I know why Liontrust shares have underperformed this year. It’s related to the AuMA, which forms the basis of the income the company is able to generate. If this falls, then the revenue potential for Liontrust falls with it.
On this point, the poor start to the year for stock markets will likely have reduced AuMA for Liontrust. The recent trading update was only up to 31 December, so there’s a fair chance that AuMA has fallen since due to the volatile stocks markets. Therefore, growth expectations may be cut. This is always a key risk for a business such as Liontrust.
Another risk I should consider is if a key investment manager leaves the company for a competitor. This often results in investors withdrawing their funds from a business, and net outflows increase. The result would be a reduction in AuMA, and therefore lower income potential again.
Why I’m buying
As mentioned, I always look for bargains when stock markets are volatile. I think Liontrust is a good example of this today. The valuation based on a forward price-to-earnings ratio is currently only 13. I think this has more than priced in the recent stock market volatility and risks ahead for this FTSE company. So, I think the stock has been oversold and I’ll be adding the shares to my portfolio.
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Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
