BlackRock Goes on Watch Lists (BLK, BAC, GS, BX)

BlackRock, Inc. (NYSE: BLK) shares are lower on WSJ reports that Bank of America Corporation (NYSE: BAC) may look to unload its 34% (approximate) stake in the money management giant.  With a $28.6 billion market cap, this is a rather large stake that the markets will have to absorb.  Shares are down only almost 1% today, and would likely be down much more if the sale had to be conducted in a large secondary offering directly into the stock market.  So what!

If there is one highly respected management firm on the street it is BlackRock.  Bank of America got this as part of its Merrill Lynch acquisition.  If the bank could magically sell that at today’s $150.00 share price then it would raise $9.7 billion in gross proceeds.  Let’s just assume that the float growing this much took off a theoretical 10% more from BlackRock ( a ‘guestimate’ on our side) and shares fell to $135.00 (again, a guess) if it was the full stake without the restrictions that prevent this from happening.

The original report calls it a non-core asset as determined by Bank of America.  It could be that the “cutting its stake” is really just a trimming of the stake.  That was hinted at.  It also looks like BlackRock has first right of refusal on any stake sale and there are limitations to how much of the stake can be sold in any single quarter.

The 52-week trading range is $138.42 to $243.80.  The stock was above $160.00 just four days ago.  From its 52-week high it is down almost 35%.  If you compare this to Goldman Sachs Group Inc. (NYSE: GS) and all of its problems, Goldman is at $148.90 versus a 52-week trading range of $129.50 to $193.60.  That means that Goldman Sachs is down 23% from its 52-week high versus 35% at BlackRock.

BofA no longer needs this stake.  The issue for Bank of America is that it missed a chance of adding significantly to its capital base because shares have pulled back so much.  Bank of America’s thought process is right here.  But being right at the wrong time is not really right.

At the end of April this was a $200 stock.  Maybe BofA and BlackRock should call their friends over at The Blackstone Group LP (NYSE: BX) to see if they could orchestrate something more smoothly here.

BlackRock’s website notes that assets under management total $3.15 trillion as of June 30 across equity, fixed income, cash management, alternative investment, real estate and advisory strategies.  If you use a 1% rule for valuing an asset manager, then the market cap should be roughly $31.5 billion.  With a market cap of $28.7 billion after a large sell-off, it does not take much to determine that this one may already be oversold.

The efficient market theory aims to imply that the markets are able to factor in almost all of the variables.  Unfortunately, we know that has not been the case for quite some time. An unusually extended period of time.  This is an overhang on BlackRock that has been there for some time.  The markets should have anticipated this and priced most of it in. “Should have” does not always work in the real world.

There would only be one answer that would keep BlackRock off of watch lists of stocks to buy.  That is if you believe that the assets under management are about to take a huge hit due to major selling beyond a market sell-off, an increasing wave of outflows.  A falling tide will lower almost all ships.  If there is no new bear market, then this just creates a longer opportunity in one of the greatest brands in the financial sector.

JON C. OGG