Justified or not, in recent years few industries have managed to scare away investors like financial firms have.

The financial industry was home to some of the worst performers of 2008 – no surprise given the massive asset write-downs, forced deleveraging, and bankruptcies that plagued the industry that year. But it doesn’t end there – while the financial crisis helped mandate a minimum level of financial health for major banks, the level of stability in the financial sector has been largely outpaced by investor sentiment. At present, scores of financial companies are still in precarious financial situations, threatened by the risks of another bout of major losses if the economy slinks back toward recessionary currents.

It should come as no surprise then that financial stocks got punished once again earlier this spring, as volatility and concerns over European debt sent stocks into red for 2010. But while investors continue to treat financial stocks with equal reluctance in the sell-off, some financial firms are better on better footing than others.

One example is the asset managers. Asset management firms, the companies that professionally manage mutual funds, private accounts, and the like, took their knocks in the latest financial crisis for obvious reasons – their assets under management (AUM), the biggest contributor to revenue for most, tumbled across the board as scared investors grabbed their cash and ran.

But that selloff is proving to be premature. After all, while investors eschewed stocks in 2008, they were pulling their money out to invest in less accessible instruments like fixed income and money market investments – two areas where asset managers dominate. Sure enough, AUM has crept back up for most firms… And so have profits.

In fact, the only things that haven’t made their way back up to pre-2008 levels are share prices.

That’s why our newest Rhino Stock play is an asset manager – one with a uniquely lucrative business stucture…

If you’ve been keeping up on weekly Market Recaps, you’ve already heard me mention the name AllianceBernstein (NYSE:AB). The New York-based firm is an institutional investment manager with $482 billion in assets under management. Unlike many of the firm’s other competitors, AllianceBernstein benefits from a storied name, well-aligned product offerings, and strong growth in 2010.

With roots going back to 1967, the company’s predecessors – Alliance Capital and Sanford C. Bernstein – merged in 2000 to create AllianceBernstein in its current incarnation.

Today, that merger has meant that AllianceBernstein has one of the more diverse customer bases in the business – around 59% of customers are institutional, 15% are private wealth clients, and 26% are retail investors. That diversification helped the company retain clients in the mass exodus from equities in 2008 (institutional clients are less prone to flee positions under selling pressure), while still maintaining the higher profit margins of a big retail investment base.

That diversification extends to AllianceBernstein’s offerings as well – with more than 36% of its clients domiciled outside the U.S., the firm was one of the first to move toward allocating large amounts of capital in overseas investments. But while diversification is one thing, growth is quite another. Earlier in August, the firm announced that it had managed to grow its AUM by approximately 5% for the month, a stellar increase. As investors continue to seek out research-driven investment expertise, AllianceBernstein should be able to maintain strong AUM growth.

Even though this stock is making substantial fundamental strides toward recovery, shares of AllianceBernstein haven’t rallied in kind. In fact, despite some rumblings of a recovery in 2009, shares are still down 71% over the past few years despite the fact that AUM (and thus revenues) only fell around 38% over that same time. As the company asset base continues to grow, that valuation is becoming even more skewed.

That brings us to AllianceBernstein’s business structure.

AllianceBernstein is set up as a limited partnership, which means that barring few exceptions most of the firm’s earnings are required to pass through to investors in the form of dividend distributions. It also changes the way we value shares of AllianceBernstein’s stock – more on that in a minute.

Attractive Financial Fundamentals

One of the biggest benefits of an asset management firm like AllianceBernstein is low overhead – and thus very high margins. 70% of the firm’s revenues come from management fees levied on the AUM that AllianceBernstein manages for its clients, and most of that money passes through to the firm’s bottom line. While a contraction in AUM should have squeezed the firm’s margins in recent years, cost efficiency has kept net margins above 80% through the financial crisis.

Of that income, AllianceBernstein’s structure as an LP has kept the firm’s payout ratio (the percentage of income paid to shareholders) at 83% — that’s 259% higher than the industry average. AllianceBernstein’s product offerings are research-driven and scalable, which means that capital investments are minimal for the company to grow. Because of that, it makes sense for the firm to pay such a generous distribution.

Another result of the company’s LP structure is a relatively sparse balance sheet. While AllianceBernstein’s books don’t give investors a very accurate picture of the company’s size, they do show that the firm has plenty of balance sheet liquidity considering its hefty cash reserves and limited debt load.

Varying Valuations

From a value standpoint, AllianceBernstein looks attractive right now…

The firm currently only trades for a 43% premium over book value – a low number considering that this financial stock doesn’t own any capital assets other than marketable securities and office equipment. The real value generator for AllianceBernstein is its dividend payouts.

But even dividends don’t tell a very good story for investors used to traditional discretionary payments from their income stocks. Because AllianceBernstein is an LP, the firm is required to pay investors the vast majority of its income for any given quarter – that means that unlike a traditional corporation, where dividends are often predetermined and fixed, this firm’s distributions vary each quarter, and the dividend yield isn’t a very telling number.

That said, financial models can give us a glimpse at what this stock is worth right now.  Based on our analysis (which allows for a fairly conservative growth projection and a generous margin of error) I believe that this stock should be priced at  around $46 – an 84% upside from capital gains, not to mention the hefty distributions.

Riding the Technicals

That upside potential has been increased by waiting on buying shares for the last few weeks. When I first wrote to you about AllianceBernstein in early August, I told you that while I liked the stock’s fundamental potential, I thought there was more downside ahead for shares.

Sure enough, the stock has fallen around 6% in the weeks since…

Frankly, that’s a great thing for us. It means that we’re able to lock in an even lower price for a stock whose valuation hasn’t changed at all. But that discount could soon be coming to an end as shares of AllianceBernstein close in on support.

Right now, this company is turning back toward a bullish bent, so I’m adding shares to the Rhino Stock Report’s portfolio today…

Action to Take: Buy Shares of AllianceBernstein (NYSE:AB) at current levels…

First and foremost in today’s market update, I want to fill you in on our AllianceBernstein (NYSE:AB) trade.  I briefed you on AllianceBernstein, the $2.7 billion New York-based asset manager, on Monday, saying that while I like this stock, you should hold off on buying shares for now.

Sure enough, shares have fallen around 2.5% this week. That gives us a slightly better buying position when we do get into shares – but I’m continuing to hold off for a more bullish “buy” signal. I’ve completed my due diligence on AB, and I’m excited about its valuation and growth potential. You’ll get my analysis when I recommend buying shares – hopefully next week.

Bad Economies = Higher Profitability?

Shocking though it may seem, Wall Street loves to punish good companies in 2010. How else can you explain the fact that despite more than three-quarters of companies beating earnings for Q2, share prices have continued to tumble this earnings season?

Poor economic data continues to be the culprit. But while jobs numbers and housing starts hold stocks’ prices down, companies are continuing to deliver strong performance numbers this month.

One trend that I’ve noticed this quarter is expanding margins – as economic events impact sales, firms are generating income growth by improving efficiency and cutting excessive spending. That’s an attractive change, because it means that we’re essentially being offered leaner, meaner equities in today’s market at lower prices than before. Value investors should be getting excited here…

I’ve said it before that “the market can stay irrational longer than most investors can stay solvent”. But old edict only goes so far – after all, we’re finally starting to see good GARP (growth at a reasonable price) plays once more, and keeping money off the table is a great way to guarantee that we’ll miss out. That shift was a big part of the reason we added Applied Materials (NASDAQ:AMAT) to our portfolio earlier this summer, and it’s an instrumental part of why we’ll soon be adding AllianceBernstein.

It’s important to remain cautious about what’s clearly a fickle market – but don’t forget that scores of stocks look fundamentally impressive right now.

NRG Buys Up Serious Assets

NRG Energy (NYSE:NRG) made the news this morning when it was announced that the power generation company would be buying $1.36 billion in generation assets from competitor Dynegy Inc. as part of the latter’s acquisition by private-equity firm The Blackstone Group.

The purchase is a good move for NRG because it provides 3,884MW of additional generation capacity from low-carbon plants at an average cost under $400/kilowatt. NRG expects that the transaction will immediately increase free cash flow and EBITDA numbers.

Computer Sciences Increases Profitability

Our computer consultancy play, Comuter Sciences Corporation (NYSE:CSC), announced earnings on Wednesday, delivering profits of 91 cents per share – a cent higher than expectations. CSC was another example of a company that’s improving efficiency to generate better earnings on flat revenues. That’s a very good thing.

The company maintained its strong EPS targets, and expects to book projects in excess of $18 billion for the 2011 fiscal year.

Watch out for a potential Rhino Alert for AllianceBernstein next week.

Cheers,

Jonas Elmerraji
The Rhino Stock Report

I’m completing my due diligence and analysis process for the newest Rhino Stock play to hit our portfolio – more on that in a bit – so, with that in mind, I’m keeping this week’s market update short and sweet…

Four of our portfolio companies announced earnings in the last week or so, and all four beat the outlook expected by Wall Street analysts. First, we’ll take a look at earnings, then I’ll give you a preview of our newest watchlist play:

SPX Corporation (NYSE:SPW) announced earnings this past week, completely obliterating Wall Street’s expectations of 71 cent per share by delivering income of a full dollar for Q2 2010. Revenue numbers fell in line with expectations. Better still, management guided Q3 EPS in the $1 to $1.10 range, exceeding analyst expectations of 89 cents.

With a capital-heavy business model, SPX Corp. took some significant knocks in 2009 as revenues were slow to recover. The numbers announced by the company last week should start to accelerate this stock’s comeback.

Our wholesale power generation play, NRG Energy (NYSE:NRG) has been another stock that’s underperformed the broad market as commodity costs, expensive capital expenditures, and stifled energy demands impacted its financials. Again though, the company surprised analysts with second quarter earnings numbers of 81 cents per share – nearly twice estimates of 42 cents. As with SPX, NRG Energy’s revenues fell largely into line with estimates.

That phenomenon of increasing income and in-line revenues is worth watching – after all, it means that efficiency is improving and margins are widening, two factors that could suggest that a more bullish model is needed for these firms. Ahead of earnings numbers, RBC analysts raised their view of NRG’s shares to outperform, with a price target of $30.

Becton, Dickinson (NYSE:BDX) is another stock that pleased investors with its quarterly numbers, the medical supply giant announced earnings of $1.30 per share. Analysts had hoped for $1.24.

Becton is one of the three stocks that’s currently in negative territory for our Rhino Stock portfolio (coincidentally, NRG is another), but that could soon change. Becton has been getting increasing attention lately, including  an East Coast Asset Management research report on the stock. The hedge fund thinks that Becton investors could see a double-digit upside in the next few quarters thanks to a deep economic moat and substantial misgivings about the stock’s real performance.

I’m inclined to agree (you can download the research report here).

Our best performer for 2010, Berkshire Hathaway (NYSE:BRK.B) announced its earnings numbers on Friday, outpacing earnings expectations despite some derivative losses for the second quarter. While the effects of derivatives were negative, the company saw improvements across most of its business lines, and I’m pleased to see that the rally shares have seen this year are being backed up by fundamental performance.

We’re currently up 21.6% on the position since adding the stock to the Rhino Stock Report’s portfolio in January.

Adding a Financial Stock to The Watchlist

Despite significant economic improvements since 2008, many investors continue to eschew the financial stocks. That’s a big mistake when you consider the fact that many of these firms are still enjoying booming business. But while investor pressures hold shares down temporarily, others could be enjoying a great time to pick up shares.

That’s the case with AllianceBernstein (NYSE:AB), a $2.8 billion asset manager that I’m adding to our Rhino Stock Report watchlist this weekend.

AllianceBernstein invests on behalf of institutional and retail clients in efforts to generate the highest returns possible. In exchange, the company earns asset management fees. But AB isn’t your typical money manager. The company’s massive value prospect, massive dividend, and unique business structure make it a potentially lucrative opportunity right now.

In fact, my valuation model places this stock at between a 16% and 70% discount to where its share prices should be. That’s a disparity that likely won’t last long as AB continues to generate substantial income…

Not so fast – don’t buy shares of AllianceBernstein just yet. I’m completing my due diligence on this stock this week… I’ll have my detailed report (along with buy and sell target prices) to your inbox later this coming week.

Until then, watch out for earnings of Computer Sciences Corp. (NYSE:CSC) on August 11.