T. Rowe Price Demonstrating Impressive Fundamental Momentum

Model Portfolio Daily Update:  January 28, 2011

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Of Note:
Look for our January 30 report in which we rebalance our model portfolios for implementation on January 31.

T. Rowe Price Group, Inc (TROW) reported 4Q10 results that were better than expected on Friday, January 28.  Assets under management increased to a record level driven by cash inflows and market appreciation, driving advisory revenues up 21% for the quarter versus last year.  CEO James Kennedy stated that “The firm's long-term investment advisory results relative to our peers remain very strong, with 86% of the T. Rowe Price funds across their share classes surpassing their comparable Lipper averages…” and the firm continues to add to investment professionals, including research analysts and sales people.

Stocks declined across the board on Friday, with the S&P 500 declining -1.79%.  Our theoretical Opportunistic Long Model declined -2.07%.  The sell off was ostensibly driven by fears of Middle East turmoil.  The sell off may or may not continue, but in our opinion just sets the market up for another buying opportunity.  Companies have become overwhelming efficient at generating cash for given level of investment.  From what we have read, Egyptian security forces are one of the best in the Middle East and it seems like a handover to former general Omar Suleiman, which may be a compromise acceptable by the populace, is likely to occur.  Sustained chaos in Egypt in our opinion is an unlikely scenario.  Even if energy prices were to rise substantially from here we would still likely see cash flow growth and ROIC expansion, thereby driving prices and PE multiples higher.

T. Rowe Price is a good case in point — ROIC by our measure has not been this high for the company since March 2007, and according to our forecasts the company could expand ROIC by another 75% over the next year.

About this report
This daily update is a supplement to a monthly report dated December 31, 2010 that details the model portfolio strategies of Ascendere Associates LLC (“Ascendere”).  For more information, please see our list of frequently asked questions, suggested tips on using our newsletter or an interview with us on Covestor Live.  See also our long-only model based on actual trade data. Please see our disclosures and disclaimers at the back of this report.