Jefferies Upgrades Virtus: 'In The Midst Of Difficulty Lies Opportunity'

In a report published Friday, Jefferies analyst Surinder Thind upgraded the rating on Virtus Investment Partners Inc (NASDAQ: VRTS) from Hold to Buy, with a $145 price target. The stock valuations is currently attractive, despite expectations of a total loss of AlphaSector AUM and a potential negative outcome of the Sec investigation.

"A positive outcome for either should provide significant upside optionality. Additionally, overall fund outflows are showing signs of improvement, and we believe will turn positive by the end of 2015. A strong balance sheet provides downside protection," Thind said.

At its peak, the company was able to realize incremental margins of more than 60 percent from the AlphaSector inflows. The analyst believes that the company would be able to offset with the "construction of a P&L that excludes the impact of the AlphaSector funds."

Virtus had revealed in May that the SEC was investigating how the company was marketing its AlphaSector funds and that Virtus has created a loss reserve of $5 million. The investigation is expected to create an overhang on the stock till it is resolved.

"We believe there are few large 3rd party intermediaries remaining that have not put AlphaSector funds on watch/hold on their platforms. As a result, net outflows from the AlphaSector funds have likely peaked and will continue to decelerate. We anticipate AlphaSector AUM stabilizing at $1B (vs. $5B currently) by year-end," Thind added.

In addition, the analyst expects the company, ex-AlphaSector, to deliver organic growth of 3-4 percent in 2015, meaningfully higher than the U.S. industry average for the mutual fund sector.