Why This Financial Services Stock Is a Steal at $50

Cymbria Corporation (TSX:CYB) finished the month of October slightly above $55. If it drops down to $50, you should buy it.

Hand writing Time for Action concept with red marker on transparent wipe board.

Image source: Getty Images

The year’s end is fast approaching. It hasn’t been a good one for the S&P/TSX Composite index, and 2019’s not looking any better.

Canadian investors are faced with some tough choices as we enter a new year — decisions that likely will affect your retirement portfolios.

Do you go on the offense looking to emerging markets and other underperforming equities or do you play defence and buy some tried-and-true bank stocks and other safer investments closer to home?

Whatever you do, I believe you can’t go wrong owning Cymbria Corporation (TSX:CYB), especially if it drops below $55. Here’s why.

Asset managers are hot

Vancouver-based PI Financial was recently sold to NG Holdings Canada Ltd.; a holding company focused on acquiring independent Canadian asset managers, for $100 million.

That’s a lot for a firm that manages $4.5 billion in assets. Why pay 2.2% of assets under management? Well, for Gary Ng, the head of NG Holdings, it gives his firm immediate scale that would take years to build.

The Canadian banks are especially interested in rolling up large investment managers. In June, Bank of Nova Scotia paid $2.6 billion for MD Financial Management, a wealth management firm serving medical professionals. Earlier in the year, Scotiabank also picked up Montreal-based Jarislowsky Fraser for $950 million, significantly bolstering the bank’s wealth management business.

It’s a quick and easy way to add assets and more important, the fees generated from those assets.

As a result, independent asset managers are considering offers they probably wouldn’t have entertained five years ago. On November 12, Calgary-based Mawer Investment Management Ltd., probably one of Canada’s most awarded money manager, hired Bank of Nova to explore all its options including a sale of the company.

“Given recent activity in the industry, Mawer has engaged an adviser to obtain more information on the options available to the firm as part of our strategic planning process,” Mawer President Michael Mezei said in an emailed statement to Bloomberg. “No decision has been made to change firm ownership. Our focus remains on delivering excellent long-term investment results for our clients.”

In the case of MD Management, Scotiabank paid about 5.3% of the approximately $49 billion in assets under management. The MD Management situation merited a bigger multiple because of the client, quality, etc., but the norm for asset managers is anywhere from 2%-6%.

Mawer could potentially find itself sitting on a multi-billion-dollar offer. 

Cymbria’s key stake

In addition to owning a portfolio of 45 global stocks including Berkshire Hathaway (2.58% weighting), it also happens to own 20.7% of EdgePoint Wealth Management Inc., a Toronto-based investment manager with $23.9 billion in assets under management.

EdgePoint Wealth generates investment fees from those assets.

For example, EdgePoint’s Canadian portfolio charges 1.8% annually for retail investors and 0.80% for investors using an advisor. Using 1% for simplicity, EdgePoint Wealth should generate approximately $240 million in revenue in 2019.

Cymbria gets a piece of the profits from those revenues. Since 2008, Cumbria’s received $43.4 million in dividends from EdgePoint Wealth. As it grows, the dividends grow.

However, it is the potential value of EdgePoint Wealth’s excellent portfolio managers that makes Cymbria Corporation such an attractive investment.

Based on 3% of assets under management, EdgePoint Wealth could fetch $720 million or more from one of the big banks. Interestingly, if you go to Cymbria’s website, it puts a valuation of $223 million on its stake in EdgePoint, which is more like 4.7% of AUM.

The point is that regardless of what happens to the markets, EdgePoint Wealth will continue to manage a lot of money for its clients, generating an ongoing stream of revenue for Cymbria.

The bottom line on Cymbria stock

Historically, Cymbria stock’s traded between a 14.2% discount to net asset value (NAV) and a premium of 33.5%. In June 2016, when I first recommended Cymbria, it was trading at a 6.7% premium. Today, it trades at a premium of 22.9%, closer to its historic high.

So, why is it a steal below $50?

The demand for top-flight asset managers has increased over the past two years as evidenced by the two Scotiabank purchases in 2018.

I think anywhere below $55 is a reasonable price, but should it fall into the $40s, you’ll be getting a screaming deal, because the 20.7% interest in EdgePoint Wealth acts as a floor for Cymbria’s share price.

If you’re going defensive, Cymbria’s a smart way to go.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Will Ashworth has no position in any stocks mentioned. The Motley Fool owns shares of Berkshire Hathaway (B shares).

More on Investing


CNR Stock: Should You Buy Today?

Canadian National Railway has been hit in recent quarters, as economic growth has slowed, with CNR stock declining 10% in…

Read more »

Family relationship with bond and care
Dividend Stocks

TFSA Investors: 3 Cheap Canadian Stocks for Retirees

These three Canadian stocks are super cheap for retirees looking for a great buy that will last the test of…

Read more »

calculate and analyze stock
Dividend Stocks

CPP Disability Benefits: Here’s How Much You Could Get

Not everybody can get CPP disability benefits. If you want some passive income, consider investing in Royal Bank of Canada…

Read more »

growing plant shoots on stacked coins
Dividend Stocks

Boosting Your Monthly Income: TSX Stocks That Deliver

Dividend investing can boost regular or active incomes, especially select TSX stocks that pay monthly dividends.

Read more »

consider the options
Tech Stocks

Better Buy (2024 Edition): Shopify or Nvidia Stock?

Shopify (TSX:SHOP) isn't the only red-hot tech stock in town that could add to recent gains.

Read more »

Bad apple with good apples

5 Stocks You Can Confidently Invest $500 in Right Now

These stocks could significantly grow your investment over the next decade.

Read more »

Illustration of bull and bear
Tech Stocks

A Bull Market Is Coming: 3 Growth Stocks That Could Thrive

Given their high growth prospects and cheaper valuation, these three growth stocks would be an excellent buy as the market…

Read more »

Golden crown on a red velvet background
Energy Stocks

Enbridge Stock: This Dividend Aristocrat Could Gain in 2024

Enbridge (TSX:ENB) stock is looking like a great buy as management expects it to grow in 2024.

Read more »