Manulife: Recent Decline an Overreaction by Investors - Desjardins

Manulife Financial Corp. (MFC) was one of the biggest gainers on markets over the past three months, but thanks to a late June slump, the life insurance giant still remains one of the better buying opportunities heading into the third quarter, says Desjardins Securities analyst Michael Goldberg.

"We believe that the recent decline in Manulife's stock price has been an overreaction by investors," Mr. Goldberg said in a note to clients.

For the second quarter, Manulife shares were up 42%, compared to 19% for the broader TSX benchmark. However, since June 19, the stock has dropped 14%.

The sell off followed news that the OSC is investigating the company's disclosure to investors regarding its segregated funds and annuity business, but Mr. Goldberg believes the real culprit behind the drop was a Manulife statement saying it may need to strengthen its reserves

He said:

As we have said in the past, we expect any reserve strengthening next quarter to be minimal on a net basis and any expectation of a net reserve release following the buildup of those reserves at a cost of C$7-billlion over the past few quarters, would be naive.

He said Manulife is now trading at 7.6x his projected 2010 EPS forecast of C$2.80, which compares favourably to his $C26.50 price target based on 9.5x 2010 EPS.

"It is time to lessen exposure to Canadian bank positions and start accumulating Canadian lifecos," Mr. Goldberg added.