Dykstra: Take a Piece of the Blackstone

Today's pick is one of the largest independent alternative asset managers in the world, a company that just reported second-quarter net income of $774.4 million, up from $224.1 million in the same quarter in 2006. On top of that, we can control 1,000 shares of this stock until March 2008 for less than a dollar in premium.

With all of the recent troubles stemming from the subprime lending issues, fund companies like Blackstone(BX Quote) have become taboo. Many politicians talk about stepping up regulation, and there is talk of changing tax treatment. However, people tend to lump things together regardless of their differences. No two asset managers are alike, and Blackstone(BX Quote) stands out from the pack.

The company manages almost $80 billion worth of assets, and under the leadership of Stephen Schwarzman it has turned extraordinary profits over the last few years.

Blackstone came public in June, shortly after Fortress(FIG Quote) did so back in February. Blackstone pulls in significantly more revenue and profit than Fortress, yet the company somehow is being traded as though it's worth less. Some of this may be because of the timing of the two companies in going public, and some may be chalked up to irrational fear.

Scharzman's success has come from buying and privatizing cheap companies, bringing them to new levels of profitability and then spinning them off.

Inherent in the concept is that once a company is spun off, its value on the open market exceeds that which Blackstone could extract privately. With that in mind, investors believe that in selling his own company on the open market, Schwarzman has signaled to investors that Blackstone is no different from any other company he buys up.

However, I believe this line of thought is largely misguided and overemphasized. In going public, Blackstone gained access to a whole new source of capital that the company can use for leverage in its business. With liquidity drying up, it's increasingly important for companies like Blackstone to find new sources of capital.

The pending purchase of Hilton Hotels(HLT Quote) and the new offer for Gokalda Exports demonstrate Blackstone's increased buying power, even as liquidity dries up. But even though Blackstone's second-quarter profit tripled, the stock price still could not gain momentum. At $23.51, the stock is trading at barely more than 1.6 times annual earnings.

I believe that now is the right time to get a piece of the action in Blackstone. This stock is so cheap that we have a great opportunity to buy the March 2008 calls for only $1 in premium. This allows us to control 1,000 shares of a monster company for a fraction of the cost. To do so, I will place a limit order to buy 10 contracts of the March 15 calls (BXCC) for $9.20 or better.

Always remember: Life is a journey; enjoy the ride!

Now let's look at the Stat Book: