A bull market is coming: One ASX growth stock down over 50% to buy and hold

I think this fallen market darling can soar again.

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Key points

  • Higher interest rates have hurt a number of areas of the share market
  • I think the fund manager Pinnacle is attractive after its fall of over 50% from its peak
  • When interest rates stop going up, I think share markets will rise and more households and institutions will be happy to invest with one of Pinnacle’s affiliates

The ASX growth stock Pinnacle Investment Management Group Ltd (ASX: PNI) has fallen heavily since its recent highs. But I think it can reach new heights in time. I think a bull market is on the way, we just don't know whether it will start next month, next year or another time.

It's down 26% from its 2023 high in mid-January and it's down over 50% from November 2021.

There aren't too many ASX shares with a market capitalisation of over $1 billion that have fallen harder than Pinnacle has.

For investors that haven't heard of this business before, it's a company that makes investments in talented fund managers that are building their own fund management outfit. Pinnacle can help in several areas, including seed funds under management (FUM), working capital, distribution and client services, middle office and fund administration, compliance, finance, legal, technology and other infrastructure.

Some of its investments include Hyperion, Plato, Resolution capital, Solaris, Antipodes, Spheria, Metrics, Firetrail and Coolabah.

In FY19, before COVID-19 impacts, the Pinnacle continued operations' earnings per share (EPS) increased by 28% to 18.3 cents.

However, in the latest result, being the FY23 half-year report, EPS dropped 27% to 21.5 cents. Its momentum has really shifted.

The cause of the profit decline was a 28% fall in the share of Pinnacle affiliate's net profit after tax. This was impacted by a large decline in performance fees after tax, with Pinnacle's share falling 86% to just $0.9 million. That was a big hit for the ASX growth stock.

Why I think the Pinnacle share price can rebound

I think it was inevitable that performance fees would fall as asset prices declined, as fund managers often have a 'high watermark'. That basically means if share prices fall, the value of the fund needs to recover that previous level before it can earn a performance fee again.

Active fund managers also found it tricky to outperform in a rising interest rate environment, where growth and defensive names were hurt, while banks and energy businesses outperformed.

But, I think that interest rates are very close to the peak. This could prove to be a catalyst for the ASX growth stock and for investment money to return to fund managers, like Pinnacle's affiliates. It could also be a spur for share prices to climb again.

I think Pinnacle's core profit, meaning excluding performance fees, can rise once interest rates stop going up. Growth of FUM can be a very useful boost for the business.

Not only could its existing fund managers and strategies rebound, but those fund managers occasionally launch a new fund or strategy. Pinnacle is also slowly increasing its portfolio by investing in new fund managers, including a recent Canadian expansion called Langdon.

Pinnacle sees offshore opportunities as compelling because there is the ability to export its model.

ASX growth stock valuation

I think we need to think about the long-term when investing, so let's look at the longer-term valuation and projections, which I believe are appealing.

According to Commsec, the Pinnacle share price is valued at 16 times FY25's estimated earnings. I think it's a great time to consider the business after the recent share price fall. It could also come with a grossed-up dividend yield of 7.25% in FY25.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Pinnacle Investment Management Group. The Motley Fool Australia has positions in and has recommended Pinnacle Investment Management Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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