Growing Wealth

In this edition of the Smart Investor newsletter, we examine one of the world’s largest alternative asset investment managers. But first, let us delve into the latest Portfolio news and updates.


Portfolio Stock Updates

❖ Texas Pacific Land Corp. (TPL) saw its stock surge on the news of its inclusion in the S&P MidCap 400 index. Inclusion in the S&P indices can result in significant stock price movements as ETF money flows into the stock.

❖ Super Micro Computer (SMCI) saw several analyst rating and price target revisions in June. The most recent comes from Barclays, who assigned a price target implying an upside of 26% in the next 12 months. Before that, Northland Securities projected an upside of 64% for the stock.

❖ Taiwan Semiconductor Manufacturing (TSM) May revenues surged by 30% year-on-year, as the chip foundry giant is benefiting from the global AI race, making semiconductors for NVIDIA.

❖ The Cigna Group (CI) has completed its $3.2 billion accelerated share repurchase program and now plans to proceed with its plan to buy back $5 billion worth of stock in the first half of the year.

❖ Oracle (ORCL) saw its stock surge in extended trading after releasing its fiscal Q4 2024 results after the close on Tuesday. Although Oracle’s revenues and earnings per share fell short of expectations, these results were more than offset by partnership agreements with Alphabet, Microsoft, and OpenAI, alongside surging bookings and upbeat guidance. Management stated that revenues for the current fiscal year are expected to grow by double digits, fueled by strong demand for AI solutions.

❖ Amphenol (APH): the electronic components leader will perform a 2-to-1 stock split today, June 12th. Each Amphenol shareholder of record at the close of business on May 31st, 2024, will receive one additional share for every share held on the record date.


Portfolio Earnings and Dividend Calendar

❖ The Q1 2024 earnings season is over, but Portfolio companies with fiscal years that differ from the calendar year are still scheduled to report. Thus, Broadcom (AVGO) will publish its fiscal Q2 2024 results today after the close, and Adobe (ADBE) will release its fiscal Q2 2024 results on June 13th.

❖ The ex-dividend dates for Taiwan Semiconductor Manufacturing (TSM), Textron (TXT), American International Group (AIG), and Amphenol (APH) are coming up in the next week.



New Buy: KKR & Co. (KKR)

KKR & Co., Inc. is a global investment firm that offers alternative asset management, as well as capital markets and insurance solutions. It manages assets through a variety of investment funds and accounts covering multiple asset classes, such as private equity, leveraged buyouts, real estate, infrastructure, credit, and more.


History of Fast Expansion

Founded in 1976 and headquartered in New York, KKR has since  grown and expanded globally via internal effort and acquisition. One of its major recent acquisitions was a global insurance firm Global Atlantic Financial Group LLC, which since 2021 has acted as KKR’s fully-owned subsidiary. This buyout added about $160 billion to KKR’s assets under management (AUM) and helped extend its global reach. In addition, the acquisition added a strong portfolio of retirement, life, and reinsurance products.

Today, KKR has a presence in North America, Europe, and Asia Pacific regions through KKR or Global Atlantic offices. With an AUM of $578 billion, including $471 billion in fee-paying AUM (FPAUM), it is one of the world’s largest alternative asset managers, serving institutional investors, family offices, corporate clients, and eligible individual investors. In the private equity realm, KKR is the world’s second-largest firm after Blackstone. Its size, expertise, and strong brand make KKR one of the main go-to firms for clients wishing to gain exposure to alternative assets.


Fact-Based Optimism

The company plans to increase its assets under management to $1 trillion or more in the next five years by leveraging a differentiated business model and a diverse set of products. The target looks achievable based on the global surge in private equity market growth, as well as KKR’s track record of fast asset growth and geographical expansion.

KKR has already succeeded in more than doubling its AUM within just two years, from 2021 to 2023, despite the challenging macroeconomic backdrop. The next five years are expected to be stronger for the firm as well as for the private equity market as a whole, as financing costs are slated to come down and global economies stabilize.

KKR’s growth plans are also supported by its strategic partnerships and multiple joint ventures. Thus, it has recently announced a joint venture with Healthcare Realty REIT to jointly invest in and own medical buildings. It also signed a partnership with Hannon Armstrong Sustainable Infrastructure Capital to create a joint climate-related investment firm and joined forces with Capital Group to create a new investment solutions initiative. In June, KKR formed a coalition of investors to fund energy infrastructure projects in the Indo-Pacific region. The firm is also looking to enter the private credit market in Japan, which would strengthen its foothold in the country.


Robust Finances, Surging Earnings

KKR maintains a strong financial profile, with a very low net debt-to-equity ratio; its debt is rated “A” by both S&P Ratings and Fitch. Particularly, Fitch applauded its strong competitive position as a global alternative investment manager, as well as its “solid liquidity, large institutional investor base, solid investment track record, strong fundraising capabilities, and relatively predictable fee-earnings stream”.

KKR boasts a robust track record of asset and fee growth, which has continued in 2023 as well as in the first quarter of this year. In Q1 2024, the company raised $31 billion of new capital, with its AUM and FPAUM both expanding by 13% year-on-year. KKR reported year-over-year growth of 22% in fee-related earnings, 28% in total operating earnings, and 20% in adjusted net income and earnings-per-share. The company surpassed analysts’ EPS estimates, as it did in all previous quarters.

These results have built on a successful 2023 when KKR grew its assets by 10% and its fee-paying AUM by 8%, all while raising $71 billion of new capital. KKR’s highly diversified investment holding portfolio has played a key role in the past year’s results, as strong growth in private equity, infrastructure, and leveraged credit gross returns more than offset weakness in its real estate portfolio.


Strong Shareholder Alignment

As a result of another blockbuster quarter, the company’s management announced a 6% increase in its regular dividend, continuing the string of annual raises stretching back to 2018. Although KKR’s dividend yield of 0.7% is still low, its financial and earnings profile supports the outlook for continued payout increases for years to come.

In addition, KKR rewards its shareholders through share repurchases. The company retired 11% of its share count between 2015 to 2023, spending $2.5 billion on opportunistic buybacks.


A New S&P 500 Constituent

KKR’s stock has been listed on Euronext Amsterdam since 2009, and on NYSE since 2010. Up to approximately 2020, its stock performance lagged behind the solid clip of its AUM growth. However, the alternative investment market took off in recent years, leading to share price increases among its strongest participants. Thus, in the past 12 months, KKR’s stock surged by over 95%, almost four times as much as the S&P 500.

As a result, the company’s market capitalization surged past $86 billion, and with investor radar turned onto the stock, it qualified for inclusion in the S&P 500 in terms of share float, liquidity, and other criteria. The index provider S&P Dow Jones Indices announced that KKR will be included in the benchmark index at its next quarterly rebalancing on June 24th. As the investment universe is increasingly dominated by passive investment vehicles, inclusion in the world’s most followed stock index is a highly positive development for any public company.


Investing Takeaway

Despite the sharp rally, KKR’s shares are still attractively valued, with its P/E ratio in line with the U.S. Capital Markets industry average and below mid-scale compared to peers such as Ares, Blackstone, and others. Based on projected cash flows, KKR is about 10% undervalued.

Taking into account KKR’s high-quality business profile, portfolio diversification, wide geographical reach, and outlook for continued strong asset and earnings growth, coupled with shareholder-friendly capital allocation policy and still-attractive valuation, we believe that KKR can be a valuable addition to the Smart Investor portfolio.



New Sell: W. R. Berkley Corporation (WRB)

W. R. Berkley Corporation is an insurance company that is among the largest commercial line writers in the U.S., providing property & casualty insurance and reinsurance worldwide.

WRB has stellar financial health with very little debt; it displays strong capital efficiency and profitability metrics. In the past several quarters, it has consistently delivered estimate-beating revenue and earnings results. Its latest quarterly report was also strong, far surpassing analysts’ projections.

However, it contained some questionable items, such as a large one-off windfall from Argentine inflation-linked bonds, which considerably skewed its investment income upwards and is unlikely to be repeated. In addition, in the past quarters, high bond yields significantly contributed to overall income, which led analysts to question the sustainability of WRB’s earnings growth further down the road when interest rates begin to decline.

Still, WRB did well in its core business, with insurance underwriting premiums growing at a solid clip. While Q1 results were aided by lower catastrophe losses – luckily for the company – its ability to raise insurance premiums could underpin insurance income going forward. On the flip side, the management’s guidance rhetoric disappointed some analysts, with a special emphasis on the slowing property insurance trend.

All in all, there was nothing alarming in the report, which is why the market’s pessimistic reaction to it was surprising, given that WRB is held in high regard by many brokerages and other financial professionals. Moreover, credit-rating agency AM Best has recently revised the outlook on WRB’s rating from “stable” to “positive”, applauding its robust balance sheet as well as its “strong operating performance, favorable business profile, and appropriate enterprise risk management”.

We will certainly revisit this robust insurer in the future, but as we don’t believe in “fighting the market” outside of several top strong-conviction picks, we view it as prudent to sell the stock.



Portfolio Stocks Under Review

❖ There are currently no stocks under review.



Smart Investor’s Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

The markets rose in the past week, helping our Club ranks to expand as Parker Hannifin (PH) crossed the threshold to return to the list of Winners, and as the Portfolio’s latest addition – Texas Pacific Land (TPL) – surged by over 31% in one week.

The Winners Club now counts 13 stocks: SMCI, GE, AVGO, ANET, EME, TSM, AMAT, APH, ORCL, GD, VRTX, PH, and TPL.

The “fallen angel” ITT is now the closest contender for re-entry, with a 28.1% gain since its purchase date. Will it close this minute gap, or will someone else outrun it to the finish line?



Smart Investor Portfolio

 Portfolio 1Y Return
Portfolio Volatility (Beta) Portfolio Dividend Yield
31.33% 1.06 0.89%



New Portfolio Additions

Ticker Date Added Current Price
KKR Jun 12, 24 $110.21

New Portfolio Deletions

Ticker Date Added Current Price % Change
WRB Jan 31, 24 $78.46 -3.88%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
SMCI Nov 8, 23 $767.61 +200.55%
GE Jul 27, 22 $160.36 +186.97%
AVGO Mar 22, 23 $1461.03 +131.57%
ANET Jun 21, 23 $304.77 +101.16%
EME Nov 1, 23 $374.90 +81.66%
TSM Aug 23, 23 $165.71 +76.68%
AMAT May 31, 23 $229.97 +72.52%
APH Aug 9, 23 $134.43 +52.00%
ORCL Dec 21, 22 $123.88 +52.00%
GD Dec 22, 21 $292.65 +43.62%
VRTX Aug 2, 23 $481.53 +38.47%
ITT Oct 18, 23 $127.18 +33.16%
PH Oct 11, 23 $523.00 +31.47%
TPL Jun 5, 24 $766.71 +31.18%
MCK Dec 13, 23 $591.29 +27.95%
HWM Apr 10, 24 $83.18 +26.32%
CI Jul 12, 23 $337.94 +25.77%
CHKP Jul 19, 23 $156.89 +23.22%
STLA Sep 6, 23 $21.50 +18.39%
CXT Oct 25, 23 $60.00 +15.92%
DELL Mar 27, 24 $131.64 +14.82%
AIT Dec 6, 23 $187.07 +13.55%
SNX Apr 3, 24 $129.50 +11.23%
TXT Nov 29, 23 $85.45 +11.10%
REGN Feb 7, 24 $1010.54 +7.76%
PYPL Apr 17, 24 $64.77 +2.11%
V May 15, 24 $274.67 -1.11%
AIG May 1, 24 $74.21 -1.46%
DOV May 8, 24 $177.27 -2.51%
CBOE Apr 24, 24 $173.46 -3.00%
ADBE May 29, 24 $462.69 -3.29%
EMR May 22, 24 $107.61 -5.36%



What’s Next?

Our next commentary will come out on Wednesday, June 19thUntil then – we wish you a world of investment success!

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