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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


August 12th 2011 Blackstone
NYSE Symbol: BX
Industry: Private Equity
Price as of 8/12: $13.05

If you didn't think things could get worse, they did. We started Monday with a 600 point decline down below 11,000 in the Dow for the first time since last fall. A rebound on Tuesday only led to more selling on Wednesday. On Thursday, another rally. Tuesday's rally was led by the Federal Reserve and their comments to keep rates low for the foreseeable future targeting an end date of mid-2013. Good news for a weak economy, but awful news for investors looking for income. Interest rates plummeted following the Fed's comments with the 2 year bill yield down to .19%, a 5 year yield of .9488%, a 10 year yield of 2.23%, and a 30 year yield of 3.7%. With rates so low, the Fed is pushing investors into riskier assets including stocks paying good dividend yields. Luckily a number of blue chip stocks have raised their dividends in the last year. In fact, within the S&P 500, 96 stocks are now yielding more than the 30 year bond at 3.7%. The list of blue chips yielding over 6% include Reynolds America, Altria, Diamond Offshore, AT&T, and Pitney Bowes among others. The main cause for the sell off is banking fears in Europe leading to a worldwide economic slowdown. It seems the roles have been reversed since 2008. Our banks are in much better shape with plenty of reserves except for possibly Bank of America. With rates remaining low for the foreseeable future, firms that borrow a lot including REITS and private equity firms should continue to perform well. This week we'll feature one of the best known and one of the few private equity firms to go public. The stock of the week is Blackstone. Blackstone had the dubious honor of coming public right before the 2008 bear market. However, the company survived the financials crisis only to watch their stock drop 30% in the last several weeks. Blackstone is not a conservative stock, but a good value within the financial industry that should reward investors over the long term.

Back in July, Blackstone reported strong quarterly results. Excluding a one-time cost associated with its initial public offering four years ago, the company earned $703 million, or 63 cents per share, in line with analyst estimates. Blackstone said its total revenue surged to $1.31 billion from $550.1 million a year earlier, driven primarily by performance fees in the real estate and private equity segments. Total performance fees rose to $672.2 million, from $32.5 million a year ago. Total expenses meanwhile eased to $984.8 million from $1.13 billion as compensation and benefit costs fell. At the end of the second quarter, Blackstone funds had ample cash of $31.4 billion of uninvested capital, or "dry powder", a record level. That's good news since all asset classes are now on sale. CEO, Stephen Schwarzman said it was the company's best quarterly performance since going public four years ago. The company also ended the quarter with record total assets under management of $159 billion, up from $111 billion a year earlier. Mr. Schwarzman also expects gradual and uneven improvement in the second half of the year, depending on the employment picture and the housing markets.

However, since these second quarter results, the whole world has changed. Having said that, Blackstone's stock looks compelling following the recent correction. Currently Blackstone is trading for 6 times earnings and 1.4 times sales. The stock also trades for 1.3 times book value of $9.63 a share and pays out a good dividend of 40 cents for a yield of 3%. As mentioned, Blackstone is not a conservative investment. But once the economy and the stock market stabilize, Blackstone should be able to outperform once again.