Idea Of The Week: Looking Forward At Janus Capital As Bill Gross Arrives

Much ink has been spilled in 2014 on the topic of legendary investment manager Bill Gross and his sudden (but by no means unexpected) departure from Pimco, the bond behemoth he founded in 1971 and the only real fixed income competitor to BlackRock Inc. (PIMCO is a subsidiary of Allianz SE (ALVG.DE)). Gross jumped to Janus Capital Group Inc. (JNS.N), which said Gross will be managing its new Global Unconstrained Bond Fund. Like the Roman god Janus, we look backward and forward at the possible repercussions.

Gross’ choice of firm was interesting. According to this Reuters story. Gross had threatened to resign from PIMCO multiple times and the company had recently decided to dismiss him. Given the impending fall of the executioner’s axe, one imagines Gross’ choices on such a time frame were fairly limited. The market reaction was certainly sharp – with billions of euros wiped from Allianz’ market capitalization and Janus shares climbing 43%.

Source: Thomson Reuters Eikon, StarMine

Analysts’ review

Janus has suffered five years of underperformance, with the stock price still requiring an enormous rally just to draw level with the S&P over the period. Focusing on Janus, let’s look at what exactly is built into the price after the exuberant rally of Sept. 26, the day of Gross’ announcement. The answer is, not that much. Despite the rally, the markets have been positively sanguine – with the market implied five-year CAGR now standing at a respectable 10.9%.

Just barely into double digits with one of the best known names in fund management now having joined the firm? That seems entirely reasonable from my perspective. Analyst revisions have already begun to surge, with Janus in the top 2% for North American stocks on Sept. 30, and no doubt most of the upgrades are yet to occur.

Source: Thomson Reuters Eikon, StarMine

Covering the shorts

If we leave aside the hyperbole and “game changing” nature of Gross’ arrival, one point to note is that many of Janus’ StarMine scores were already looking attractive, with the Smart Holdings score, Earnings Quality and Insider scores all at or very near the top decile. One other point of note, or schadenfreude, is that Janus already had an elevated short position – hedge funds were positioned for a sharp share price fall. I think it’s safe to assume that there were some cranky long/short equity managers playing with the kids on Saturday morning, the day after the big news.

Source: Thomson Reuters Eikon, StarMine

Scanning the horizon

As Janus symbolizes transitions and beginnings, it seems an entirely appropriate place for Gross to start over. As the market begins to step back and take a rational look at Janus, and the billions of dollars that are likely to follow Bill’s long-term track record, it seems that Janus’ stock price doesn’t really reflect the new reality.

Source: Thomson Reuters Eikon, StarMine

Still room for a lift?

Janus’ 15 year median P/E ratio is 15.7, exactly where today’s ratio sits. With the arrival of one of the megastars of the fund management industry, I’d have to assume that the company’s prospects have lifted significantly.

So the stock is trading in line with the median ratio despite the potential of billions of dollars of new assets under management that would drive both earnings and margin unless Gross cut himself a particularly sweet deal (unlikely under the circumstances). There’s a good chance the stock may have plenty of runway in the medium term.

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