Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long IdeasMarket Insanity

Is BlackRock making Money?

The hottest and sexiest stock in the market right now is not Amazon (NASDAQ: AMZN) but the rather boring asset manager BlackRock Inc. (NYSE: BLK). BlackRock’s shares were trading at an incredible $525.06 on April 19, 2018.

Share prices shot up because of news stories that BlackRock CEO Larry Fink’s income had expanded to more than $1 billion. The workaday hand on investment manager Fink has become a star because BlackRock now manages $6.1 trillion in assets making it the world’s largest fund manager, Bloomberg reported.

BlackRock’s price should teach investors an important lesson; never underestimate the effect of star power on Wall Street. Investors and traders are like everybody; else they are just as likely to go ga-ga over a superstar as a teenaged girl at a rock concert.

Part of Fink’s appeal is the miniscule amount of BlackRock shares he owns; around 0.7% according to Bloomberg. Fink is making lots of money off a tiny BlackRock holding; and like Warren Buffett, he does not seem to be greedy.

Is BlackRock Making Money?

Okay, Larry Fink is making money at BlackRock but is anybody else? Judging by some of the financials I found at Stockrow the answer is yes.

BlackRock reported a net income of $2.304 billion, an operating income of $1.489 billion, and a gross profit of $3.096 billion for just 4th Quarter 2017. That income translated into a lot of cash the company reported a free cash flow of $1.287 billion and an operating cash flow of $1.342 billion for the 4th Quarter.

There was also a lot of money in the bank in the form of $7.038 billion in cash and equivalents on December 31, 2017. BlackRock’s value was incredible it reported total assets of $220.217 billion on 31 December 2017.

More importantly, the company reported a debt of $5.014 billion and liabilities of $187.926 billion on the same day. These are great value characteristics; which means nobody is going to regret holding BlackRock stock for a long time.

BlackRock had really good year in 2017, it made $12.491 billion in revenues, $11.078 billion gross profits, $5.272 billion in operating income, and $4.070 billion in net income in the 12 months that ended on December 31, 2017. It is easy to see why investors love this company.

BlackRock profits from Volatility

The secret to BlackRock’s recent success is volatility, in particular, an odd mix of low-interest rates, high stock prices, and widespread doubts about fiat currencies.

Vast amounts of money have been flowing into the US stock market, and exchange-traded funds BlackRock controls because it has nowhere else to go. Interest rates are low, a 30 year U.S. Treasury bond was paying just 2.97% on April 17, 2018, and a one year was paying 1.92% on the same day.

The most common interest rate for a savings account in April 2018 was .01% Value Penguin calculated. The highest savings interest that Value Penguin found was 1.45%.

To make matters worse real estate prices are ridiculous highs, which is keeping many out of the property market. A related factor is the fear that real estate is in a bubble and about to collapse which drives people to more liquid investments like stocks or ETFs.

If people want any return on their investment they have no choice but to go to Wall Street or buy cryptocurrency these days. Stocks and ETFs are also the only investments that a lot of people can afford. That is good news for BlackRock, bad news for savers. This is why BlackRock’s revenues grew by 16% or $55 billion in 2017.

Is BlackRock a good investment?

This means that BlackRock is likely to make money and see its stock values grow for the foreseeable future. It does not mean that BlackRock is a good investment.

Right now, BlackRock is overpriced; its shares should be trading at around $200 so there is room for a big fall here. Expect to see a lot of volatility in BlackRock shares for the foreseeable future as speculators try to short them.

The best advice for investors is to wait until BlackRock’s share price collapses and buy it. The stock is good but ridiculously overvalued.