Banking
We’re bending our investment rules and starting positions in 2 of our Bullpen stocks
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Two stocks are getting the call-up from our Bullpen stocks-to-watch list. We’re initiating positions for Jim Cramer’s Charitable Trust in BlackRock and CrowdStrike . We’re buying 17 shares of BLK at $1012.44 each. We’re buying 60 shares of CRWD at $305. Following Wednesday’s trades, BlackRock will have a roughly 0.5% weighting in the Trust, the portfolio used for the Investing Club. CrowdStrike will have a roughly 0.5% weighting. BlackRock is the world’s largest asset management manager and leading provider of investment, advisor, and risk management solutions. It offers a broad set of investment products in equity, fixed income, multi-asset, alternatives, and cash across different client types like Institutional, Retail, and ETFs, around the world. About 43% of its base fees come from actively managed products, 42% from ETFs, 8% from Index, and 7% from cash. Blackrock reported a strong set of third-quarter results last Friday. Total revenues increased 15% year over year to $5.2 billion thanks to the positive impact of markets on average assets under management, 5% organic base fee growth, and higher performance fees. And that 5% organic base fee growth was the company’s highest level in the last three years. BLK YTD mountain BlackRock YTD BlackRock lived up to its reputation as a premier asset gatherer, generating $221 billion of net inflows in the quarter – a company record. The company is having a huge year. Through the first three quarters of 2024, net inflows already surpassed the full-year net inflows of both 2022 and 2023. Assets under management stood at about $11.5 trillion at the end of its third quarter, up $2.4 trillion year over year. Profitability was another highlight. The company continues to deliver sustained asset and technology services growth at scale while remaining disciplined on expenses. Adjusted operating margins expanded 350 basis points year over year to 45.8%, leading to adjusted earnings per share of $11.46, well above estimates of $10.40. The company bought $375 million worth of shares in the quarter, slightly reducing its weighted average diluted shares. The company also pays a dividend yield of about 2% and has increased its payout for 15 straight years. One of the company’s biggest strategic pushes right now is in alternative strategies like private markets and infrastructure. Earlier this month, BlackRock completed its acquisition of Global Infrastructure Partners, a leading independent infrastructure fund manager. The company believes this combination “will provide clients access to investment and operating expertise across the infrastructure landscape.” Blackrock believes infrastructure is a $1 trillion market today and will continue to be one of the fastest-growing segments of private markets in the years ahead. The deal brought in an additional $116 billion of client AUM and $70 billion of fee-paying AUM. It also added long-dated, non-redeemable assets to Blackrock’s business, which the company likes because it diversifies its revenue and earnings mix. Management believes these private market assets will positively impact the company’s overall effective fee rate by 0.5 to 1 full basis point. The stock has had a big move this year, gaining roughly 24% but we think the gains can continue. It’s a pretty steady business with market-leading organic growth, margin expansion, plus a dividend and buyback. Also, BlackRock should see an acceleration of inflows into Fixed Income as central banks cut rates, pushing some of the record amount of assets in Money Markets to flow into bond funds and ETFs. CEO Larry Fink addressed the large cash holdings of investors on the earnings call, explaining that “investors will have to re-risk to meet their long-term return needs.” Fink sees opportunities for investors across several structural trends like “rapid advancements in technology and AI, and rewiring of globalization, and the unprecedented need for new infrastructure.” Fink is a thought leader in the banking industry. We’re starting the position off on the smaller side given its recent run to new highs, and we’ll take advantage of pullbacks to add to our position. Our price target is $1,150, which is roughly 24 times the consensus 2025 EPS forecast of $48.47 per FactSet. CRWD YTD mountain CrowdStrike YTD Next up is CrowdStrike, the cybersecurity company led by its co-founder and CEO George Kurtz, who Jim has had on “Mad Money” many times. CrowdStrike specializes in endpoint protection through its AI-native platform called Falcon. The Falcon platform operates entirely in the cloud, allowing for rapid updates, scalability, and ease of deployment. There’s a good whitepaper on CrowdStrike’s website published by IDC that explains the value of the CrowdStrike Falcon XDR platform. It stops breaches. But it also saves time by speeding up threat protection and response while also helping security teams do more with less. It saves money by reducing the cost of cybersecurity – companies can get rid of less effective platforms and consolidate point solutions. The IDC report found that customers realized a $6 return for every $1 invested with a 5-month payback period after they used the Falcon XDR platform. CrowdStrike was virtually unstoppable this year until July 19 when a faulty software update to its Falcon Sensor security software system caused a global problem with computers running Microsoft Windows. It was a major blow for a cybersecurity company, especially one with a pristine reputation. There was a lot of speculation that the outages would hurt their business from customers revolting, resulting in a loss in market share. However, when CrowdStrike reported at the end of August, the results were excellent with revenue up 32% year over year and adjusted earnings per share of $1.04 versus the 97-cent consensus. Even better, the company showed a gross retention rate of 98%, a sign that virtually no business was lost from the event. More recently, the company held its annual Fal.Con conference in September and it seemed to get a great reception, with attendance up 30% versus last year. Microsoft CEO Satya Nadella spoke at the event which suggested the two companies have buried the hatchet. They’ve had this rivalry for years, but ironically the incident brought the two companies closer together. Shares of CrowdStrike may be up almost 40% since bottoming in early August, but it is still down more than 10% from the July 19 incident and about 23% from its closing high of $392.15 on July 1. This could be an opportunity since virtually no business was lost. Our initial price target is $350, which is roughly where the stock traded right before the July 19th outage. We think the stock should return to these levels since virtually no business was lost. You might be wondering if adding CrowdStrike to the portfolio means that we are heading to the exit on Palo Alto Networks . Does having two cybersecurity companies violate our rules about diversification? We typically don’t like to double up in one area, but we think there is room in the portfolio for both of these best-of-breed names because of position sizing. Palo Alto Networks isn’t that big of a position in the portfolio anymore because of all the huge gains we’ve locked in. Cybersecurity is a great area to be invested in. We’re in an elevated threat environment given all the hostilities happening around the world. Artificial intelligence and Gen AI have made bad actors more sophisticated, so corporations need to invest with the leaders in the industry to stay protected. We’re almost a year into the new SEC rules surrounding the disclosure of cybersecurity incidents, and greater awareness of threats has been a tailwind. (Jim Cramer’s Charitable Trust is long BLK, CRWD, MSFT, PANW. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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