Kass Katch: Buying Alliance Bernstein

The company enjoys a low tax rate and distributes most of its cash flow in the form of a 5.4% dividend yield.
By Doug Kass ,

This blog post originally appeared on RealMoney Silver on May 2 at 7:43 a.m. EDT.

Forecasting the general direction of stocks is a tricky proposition in here, particularly in light of the vicious group rotation. What I do know is that the laggard consumer discretionary and financials are now being joined by transports and tech on the upside and appear to be breaking out to recovery highs as money shifts out of the former leaders (dot.corn, ag/fertilizer, materials, infrastructure, energy). Whether this is a broadening process, implying more upside, is subject to debate, but I will be watching the volume, breadth and sentiment for clues.

Yesterday, I was forced to cover a few shorts as I was premature in expanding the size of my short book -- and in light of the overriding notion that discipline should trump conviction.

I do believe the financial sector has some upside left, and, reflecting that, I have no financial shorts left at this time. In fact, I am in general agreement with

Jim "El Capitan" Cramer

that:

    1. the financials have the best charts extant; and 2. for long-term investors, selected financial shares (and their franchises) are now available on the cheap.

As my regular readers know, I recently purchased a long position in

Citigroup

(C) - Get Report

. Now, I have also initiated a long in

AllianceBernstein

(AB) - Get Report

. This leading asset manager is structured as a master limited partnership. As such, the company enjoys a low tax rate and distributes most of its cash flow in the form of a dividend, with a current yield at 5.4%. With nearly $800 billion in assets, of which only $10 billion are hedge fund assets, AllianceBernstein's market cap is about $5.5 billion, which is low when one considers the to the fact that Alliance purchased Sanford C. Bernstein in mid 2000 for $3.5 billion ($1.47 billion in cash and the balance in stock).

I consider AllianceBernstein as a levered proxy to the capital markets, and, prior to my purchase of these shares (coincident with the bear market correction), AllianceBernstein's common had dropped from $92 to $60. I purchased AllianceBernstein at a large valuation discount to its peers, and, over the last month, the shares have dramatically underperformed industry leader

T. Rowe Price Group

(TROW) - Get Report

, which has tacked on 10 quick points in the last week or so. Just look at this

chart

, which compares the one-year share prices of T. Rowe to AllianceBernstein.

AllianceBernstein reported first-quarter 2008 results that were a few pennies below expectations, but normalized for an unrealized mark-to-market loss on the company's deferred comp pool (a loss of 13 cents per share) and an arbitration award (a loss of 4 cents per share) that will likely be recaptured in insurance, the results actually exceeded expectations. What I liked about the quarterly report is that net flows were better than expected and that expense control was excellent and should produce leveraged profit results if the capital markets stabilize/improve. What I didn't like about the quarter is that its strategies continue to trail its peers -- though Chairman Sanders said on the conference call that April returns beat benchmarks -- but, since AllianceBernsten is more of a value buyer, they tend to be early.

Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.

At the time of publication, Kass and/or his funds were long Citigroup and AllianceBernstein, although holdings can change at any time.

Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.

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