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Homeowners Choice, Inc. (HCI) is a small cap, Tampa Florida-based insurance holding company that provides homeowners', condominium owners' and renters' insurance. HCI recently announced the formation of an information technology division called "Exzeo" that will market proprietary personnel and production management software to other insurance companies. At the writing of this article, HCI was trading at $24.75 with a 52-week high of $27.95 and low of $11.85. The $0.225 dividend yields 3.56%. I believe HCI can be a $35 stock when the market recognizes its true value and here is why.

Housing Recovery in Florida

The Florida housing market is in the midst of a booming recovery from the effects of the "great recession." Many parts of Florida are seeing 25% sales increases from a year ago and foreign buyers are rushing in with all-cash purchases of anything they can get their hands on. Land and home prices have been rising 2% per month in large suburban areas and the current demand for new homes is so great that many builders have instituted lottery systems to determine who gets to buy a new home! All of this is very good news for the property and casualty insurance business, which is the bread and butter of HCI's operations.

Earnings Growth, Cash Flow, and Price to Earnings Growth Ratio

HCI's five-year annualized EPS growth rate is 82% and projected to be 15% annually over the next three years, more than double the 6.3% sector expectations. HCI has a P/CF ratio of 7.2 vs. the industry average of 12.1. Generally, a P/CF ratio below 10 indicates that a company is undervalued. HCI's PEG ratio is a low 0.52 compared with the 1.39 industry average. The lower the PEG ratio, the more undervalued the stock.

Multiple Expansion

As of Monday April 23, HCI was trading at 7.8x projected 2013 earnings of $3.18 per share, and just 6.8x 2014 projected earnings of $3.67. 10x earnings is a reasonable multiple for this stock given the industry average of 10.2x projected 2013 earnings and 14.1x projected earnings for the overall market. There is room for multiple expansion to 10x earnings.

Other Factors and Conclusion

Analyst sentiment and technical indicators for HCI are "highly bullish." Given what I know about this company, I don't see much downside risk over the next several months and there is technical support around $24.00. HCI has a high 1.7 beta and can be volatile, so a negative surprise (catastrophic hurricane) could hurt your investment quickly.

Indications are that HCI is an undervalued stock and the rapid Florida real estate market recovery should be a catalyst for strong earnings growth for at least two-three years. HCI is very optimistic about its new software, that by all accounts is being well received in the property and casualty insurance sector. It is not unreasonable to expect HCI to trade at 10x 2014 projected earnings by year end, producing a target price of $35. The company reports on May 7, and I am accumulating on any weakness ahead of the report. That being said, as with any stock, there is the risk of capital loss, so conduct your own research and speak with your investment advisor about HCI.

Another housing recovery play that I wrote about here two months ago, GenCorp (GY) just announced very good news about its new rocket engines; but the real story continues to be its massive raw land holdings in eastern Sacramento County and the shortage of buildable lots in Sacramento, during a vibrant real estate recovery. I still believe GY, trading around $12.40 when I wrote this article, is a $22 to $23 stock when it finally decides to unlock its undeveloped real estate, which could be soon.

Source: Homeowners Choice: Housing Recovery Side Bet