ONEX Corporation (TSX:OCX) has been one of the most reliable stocks listed on the TSX. Since 1996, the stock has grown from just $3 per share to more than $70 today. Every dip along the way has been an incredible buying opportunity.
For example, in 2002, shares dropped around 40%. By 2007, the stock had completely rebounded, gaining more than 300%.
The next sizable drop came during the financial crisis of 2008, when shares shed around one-third of their value. From their lows in 2009, the stock went on to return nearly 500% in less than a decade.
Given this historical backdrop, you may be excited to learn that ONEX stock has experienced another rare dip in price. Over the past 12 months, the company’s stock is down around 25%.
What’s the reason for the drop? Is this yet another fantastic buying opportunity?
Tap into this niche market
At its peak, ONEX had a market capitalization in excess of $10 billion. After the dip, its value is down to around $7 billion. Still, it operates in an industry worth several trillions: private equity.
In 2015, I wrote how ONEX is the best way to capitalize on Canada’s private equity industry, a segment of the market typically reserved for large institutions and hedge funds. Shares went on to gain 40% since that article, but with the recent dip, prices are back to similar levels.
In the past, ONEX actually had a portfolio of private equity interests. Therefore, the value of ONEX stock shifted based on the underlying value of its portfolio. In recent years, however, the company has transitioned to a model much closer to Brookfield Asset Management Inc., which manages a collection of niche funds. ONEX, of course, operates funds within the private equity sector.
“The company’s client base appears very long-term oriented, hopefully meaning that the company can rely on this portfolio to generate fees in good times and bad,” I wrote in 2015. “Almost 75% of the capital is from pension funds, bank or insurance companies, and endowments.”
Was this conclusion overly bullish given the recent dip?
Have no fear
Over the past 30 years, ONEX has amassed an impressive track record, with 28% annual returns on its private equity investments. The company should be able to lean on that proven history to grow its asset management business.
In 2018, the company managed $23.2 billion in capital, an increase from 2015 levels of $15.9 billion. Previously, management had targeted growing assets under management by 10% annually. Over the past four years, they’ve exceeded those goals.
Recently, investors have been questioning this growth trajectory. In fact, assets under management fell by nearly 4% from 2017 to 2018.
Attracting new capital and raising additional funds can be lumpy, however. In both 2013 and 2016, ONEX experienced quarters where assets under management fell. In each case, they continued to grow over the following quarters.
Stick with ONEX
Long term, there’s no reason to believe that ONEX won’t be able to ramp its fund management business.
Currently, the company’s investment portfolio alone is worth $6.4 billion. With a market capitalization of just $7.4 billion, the market isn’t ascribing much value to its fund management business, but it should.
Brookfield Asset Management Inc began this model in 2003, and shares are up more than 1,000% since. ONEX may be on pace to repeat this feat, making the recent dip a great opportunity.
