Go With the Pros and Grab Blackstone

Although much has been made of the potential for Blackstone and its peers to suffer from the credit crisis, it's not really germane. Blackstone has been noticeably absent from the recent high-stakes, high-price bidding of the past year and has not taken on excessive debt in its deals. Instead, the credit crunch works in its favor, as it gives Blackstone managers a chance to put their limited partnership's capital to work at lower valuations than it otherwise would have seen. Also, as many top hedge funds and brokerages teeter, a company like Blackstone gets a chance to hire the best fleeing talent.

Blackstone has diversified in recent years from private equity. While that division still provides 40% of revenue, a third of revenue now comes from real estate, and a quarter from alternative-asset-management and investment-banking activities.

It's important to note that Blackstone is not just an investor and deal maker. It actually puts new managers in place at the companies it buys. This "transformation czar" creates the bulk of Blackstone's earnings by making companies better -- not just bigger -- through heavy intervention. Of all the companies in its group, we should focus on Blackstone, because its size allows it to see the best deals, and it is just now in the process of becoming a brand name along the lines of Goldman.

Figure that earnings growth will come in at about 20% per year during the next few years. Although it's really hard to value a company with so many moving parts, it looks cheap here at $24. My target is $37 in late 2009, which would be a 50% move.