As someone who has spent the past 23 years immersed full time in the investment industry, I have a pretty good feel for the cyclical nature of the business as well as its prospects for the future. The late 2008-early 2009 market meltdown created some incredible bargains in investment related shares. Many of these stocks rebounded nicely afterward, but then sold off again during the April-August 2010 market pullback.

I am going to spotlight three such firms today as having outstanding upside, with limited risk from already subdued valuations. They each operate in somewhat different segments of the investment management universe.

Here are snapshot statistical peeks at each of them:

Alliance Bernstein (AB), Calamos (CLMS), State Street (STT) Comps
Source: Standard & Poor's

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State Street(STT) - Get Report is one of the world's largest custodians of mutual fund and managed assets, with over $19 trillion in assets under custody and administration and almost $1.8 trillion under direct management. 70% of its total revenue is fee based, making their income stream quite predictable. Consensus estimates for 2011 are now running about $3.75 putting their forward P/E at just 10x -- a huge discount to STT's historical multiples.

AllianceBernstein(AB) - Get Report is a Master Limited Partnership, or MLP. Under this structure, it pays an extremely low tax rate and are required to distribute almost all their annual net income to their unit holders. Assets under management were about $482 billion, as of July 31, 2010, and are projected (by Value Line) to reach over $700 billion by 2013-2015. This is a high yield play, with average payouts of $2.68 per unit annually over the past decade, and $2.32 per year even if you throw out the top two years as outliers that are unlikely to repeat. Value Line estimates a three to five year distribution rate of $2.72 which would equate to a 10.88%, on last week's closing quote. AB now trades for just 12.5x expected 2011 earnings.

Calamos Asset Management (CLMS) is a small-cap money management firm that runs both closed-end and open-ended mutual funds, as well as individually managed accounts. It is well respected in the areas of convertible securities and international investing, and their funds have performed very well in the post-2008 climate. Assets under management are over $20 billion. The dividend rate was cut in 2008 but has since been raised to a well-covered $0.075 quarterly, for a current yield of 2.85%. Consensus views for 2011 are centered on $0.90, putting CLMS's forward multiple at only 11.7x.

Alliance Bernstein (AB), Calamos (CLMS), State Street (STT) One Year
Source: Yahoo Finance

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You can see how market sensitive these three issues have been. AB, STT and CLMS shares all hit annual highs in the March-April period and 52-week lows in early July, exactly in line with the broad indices. These three firms should perform brilliantly if the market continues to rally.

Option minded traders can consider writing (selling) puts on any or all of these issues as a good way to play the upside, without laying out any cash up front.

Trades: Sell to open AB April 2011 25 puts at $3.50 and sell to open AB April 2011 30 puts at $7.30, AND/OR Sell to open STT January 2012 40 puts at $8.20 and sell to open STT January 2012 45 puts at $11.40, AND/OR sell to open CLMS February 2011 10 puts at $1.00 and sell to open CLMS February 2011 12.50 puts at $2.50.

At the time of publication, Paul Price was long shares and short options of AB, CLMS and STT.

Dr. Price joined Merrill Lynch in 1987 and over the next 13 years worked with A.G. Edwards, Wheat First and Ferris, Baker Watts. Dr. Price enjoyed enough success to retire in October 2000, but he continues to write and give investment seminars.

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