RBC Capital Markets published a research report today, March 26th, highlighting Fortress Investment Group LLC (NYSE:FIG) as a hidden gem with “significant upside as the valuation does not seem to reflect the growth prospect embedded in the business model.” RBC currently rates Fortress as Outperform with a price target of $11. Fortress Investment Group LLC (NYSE:FIG) was trading almost unchanged in New York at $7.70 as of 12:45 PM ET today

RBC analyst Bulent Ozcan offers support for his view that “Fortress’ shares provide a rare opportunity to capitalize on the economic recovery.”

Fortress shares undervalued

The RBC report points out that 50% of the current purchase price is represented by the company’s net cash, investments and unrealized incentive income. Given this situation, Ozcan says, “Fortress Investment Group LLC (NYSE:FIG) in particular, appears deeply discounted vs.traditional asset managers and could provide significant upside.”

Fortress Investment Group Balance Sheet

Finally, the report mentions a number of potential catalysts that could help propel the share price closer to their $11 target for the equity:

” • We believe that the company could raise $3 billion of capital using its permanent capital vehicles. This could add about $0.16 to distributable earnings over the next 12 to 18 months.

• Hedge fund performance is very strong and could lead to earnings surprises. With more assets eligible for incentive income and strong year-to-date performance, incentive income could exceed expectations.
• Restructuring of Newcastle and Eurocastle could accelerate incentive income generation.

• We think that the Affiliated Manager Platform and Logan Circle could be potential catalysts for long-term asset and earnings growth.”

Limited downside risk

Fortress Investment Group Payout ratio

Ozcan argues that Fortress shares have limited downside risk because of high total yields. “We believe that the downside risk is limited given Fortress Investment Group LLC (NYSE:FIG)’s current valuation. Investors buying Fortress’s shares could experience hefty yields over the next two years. Based on our analysis, the shares could provide investors with total yields of 24% to 29% over the next two years.”