Are Magellan Financial Group Ltd (ASX: MFG) shares a high-conviction buy today?
The Magellan share price is up over 8% in the past week, despite no major news out of the company.
Despite these moves, the Magellan share price remains far away from the highs we saw in February. At one point, Magellan shares were asking close to $75 ($74.91 in fact).
But today, the same shares are on offer with a 33% discount. So is this a company that is deserving of a high-conviction buy on the ASX today?
Why have Magellan shares been sold off in this crash?
Looking at the metrics for this fund manager, I would say that this is a case of Magellan falling back to earth, rather than into the bargain bin. On its current share price, Magellan is trading on a price-to-earnings ratio of 22.4 and a trailing dividend yield of 4.09%.
Even though the company is still 33% off of its highs, it has also risen by 66% in the last month off of the lows we saw in March (talk about volatile).
Magellan is indeed a volatile share, but it is so due to the cyclicality of its business model.
The company benefits from a snowball-like effect in good times as investors who are keen to enter the markets in a time of rising stock prices buy into Magellan's funds. This further increases Magellan's funds under management and performance fees, all while more and more investors buy-in the longer the bull run continues. It's this effect that I believe to be behind Magellan shares rising from $23 in January 2019 to nearly $75 in February of this year.
Of course, this effect also works in reverse in a bear market, which explains the huge winddown in Magellan's valuation between February and March.
Are Magellan shares a buy today?
Normally, I dislike cyclical businesses as a long-term hold. But I think Magellan has a number of factors that justify an investment. Firstly, Magellan is headed by its co-founder and chief investment officer Hamish Douglass.
Mr Douglass is regarded as one of (if not the) best fund managers in the country. He has been instrumental in growing Magellan into the powerhouse it is today.
Further, Magellan has been working hard to expand its retail offerings to investors in recent years. Last year saw the launch of the Magellan High Conviction Trust (ASX: MHH), which has been very well received by investors already (with $879.9 million in funds under management as of 31 March 2020).
Magellan has also flagged it is working on a comprehensive retirement product as well, which should prove very popular (in my opinion) in this era of low interest rates when it does come time to launch.
Foolish takeaway
I think Magellan is a top-notch company and one I would love to own myself at the right price. Volatile shares like Magellan can be vexing to hold, but I think investors who buy for a good valuation will be doing themselves a future service!
