If you’re waiting for a marketwide sell-off to materialize before plowing into a bunch of new positions, then kudos. You understand that the market ebbs and flows and that you can and should use these swings to your advantage.
If you understand the market is forever rising and falling, though, then you probably also know these ebbs and flows can be rather unpredictable. That means trying to perfectly time your entries can cost more money than it saves because of the gains missed in the meantime. As always, the key is balancing the true risk of stepping into a certain stock with that stock’s plausible upside potential.
Shares of T. Rowe Price Group (NASDAQ:TROW) are too cheap right now to pass up while waiting for a market crash that may never actually take shape.
Nice work if you can get it
You know the organization. T. Rowe Price is, of course, the company that manages a large family of mutual funds with the same name. With $1.6 trillion worth of assets under its management, there’s even a good chance that you’re a customer.
There’s also a good chance you’re underestimating the reliability of the mutual fund industry’s business model.
Have you ever thought about how fund companies make money? Some charge an upfront load when you enter a new position, but that’s not necessarily the primary goal; that load fee is typically shared with the brokerage firm anyway. Rather, fund companies are hoping you become long-term customers so they can collect a recurring management fee, year in and year out. These fees are minimal, usually costing less than 1% of the value of assets held by a particular fund’s investment pool. Once you’re a fund company’s customer, though, it no longer has to fight to bring you into the fold. You’re annuitized, in a sense, as long as you stick with that investment — which investors typically do. And this management fee is automatically collected regardless of a fund’s performance.
The end result? A steady stream of predictable revenue and profits.
The proof of the pudding
You have only to look at T. Rowe Price Group’s top and bottom lines for the last year to appreciate the premise. Despite lockdowns and the subsequent economic slowdown, T. Rowe Price managed to beef up 2020’s revenue by more than 10%, driving a 15% increase in net operating income and extending a long-standing growth streak.
Makes sense. A slew of bored consumers turned to the stock market for entertainment in lieu of sports and other live events. Indeed, 2020 ushered in the era of meme stocks and rekindled rarities like short squeezes, SPACs, and more. That mania has only been amplified this year.
Except that none of those things generate revenue or earnings for mutual funds. Fund revenue is linked only to the amount of money that fund manages. Because of this, T. Rowe Price’s 2020 revenue growth can be mostly attributed to the 12.5% increase in the amount of assets it was managing by the end of the year. And that growth can largely be chalked up to the fact that the S&P 500 (SNPINDEX:^GSPC) itself ended 2020 more than 16% above where it ended 2019.
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