Bet on Private Equity (AINV, FIG, BX) for a Second Half Rebound

These firms raise money from investors, which they use to buy and sell other companies. They charge fat management fees and take a healthy portion of the profits when things are going well. Right now, "things" are not going well, and private equity stocks have been crushed.

The nature of the private-equity model precludes liquidity. When the market is reeling and the economic outlook is shaky, these firms cannot just hit the "sell" button like a hedge fund trading in liquid instruments might do.

When they do a deal and buy a company, they are usually locked in for at least three to five years, and sometimes longer. Thus, in bad environments their stock prices get beaten down as the value of their portfolio companies decline. As a result of this lack of liquidity, and investor concern, sell-offs can become overdone.

That is why if the market turns around and begins climbing, AINV, FIG, and BX will likely significantly outperform to the upside just as they have underperformed to the downside. In fact, buying Fortress today would allow you to pick it up at a significant discount from when Goldman Sachs (GS) upgraded the stock in early May from neutral to buy and slapped a $7.50 price target on it.

Currently, AINV has fallen 30% to $9.24 in just the past three months and is well off of its 52-week high of $13.69. During the same period, BX has lost 37% of its market cap and the shares are trading at $9.20 compared to a 52-week high of $17.22. FIG has declined nearly 35% to $3.01, which is about half of where it was in the fall of 2009.

If you are bullish and willing to put your money where your mouth is in hopes of a big payday, now is the time to buy private equity.

Jason Raznick is the business editor of Benzinga.com.