Insurance stocks seem to be one of Wall Street’s best kept secrets. While technology stocks, mining stocks and even retail stocks are top of mind, insurance stocks don’t make the headlines unless something goes very wrong. We all purchase insurance but we don’t all purchase insurance stocks, although they are very large holdings in the legendary Warren Buffett’s portfolio. However, insurance can be a low risk business which generates consistent profits. The best run insurance companies will reward patient shareholders in the long run.
We screened our database of 5000 stocks looking for insurance companies with a bullish rating, a strong balance sheet and good profit margins. We further looked for significant profit potential based on the difference between the current stock price and a valuation target from WikiWealth.
Our rating is based on a 20-factor model incorporating Financial Metrics, Earnings Performance, Price/Volume activity and Expert Opinions to determine a stock’s potential over the next 3-6 months.
Here are four companies in the Property & Casualty insurance business, and one in the Healthcare insurance business. These 5 companies passed our criteria and also passed the Warren Buffet Intrinsic Value Analysis test developed by WikiWealth which tries to mimic the value investing approach used by Warren Buffett. They all have bullish ratings.
We believe these stocks will outperform over the longer term. However we are now in a phase of this two year bull market where buying attractive stocks on weakness is the preferred strategy.
|Company (Ticker)||Market Cap||ROE||Operating Margin||Current Price||Buffett Potential Price **|
|American Financial Group (AFG)||4B||10%||17%||$34.48||$114|
|Axis Capital Holdings Ltd (AXS)||4B||15%||26%||$36.27||$71|
|Everest Re Group Ltd (RE)||5B||10%||13%||$87.20||$251|
|Navigators Group Inc (NAVG)||0.8B||9%||14%||$52.10||$96|
|WellPoint Inc (WLP)||26B||12%||8%||$67.99||$228|
American Financial Group Inc (AFG): 34.48
AFG’s very bullish rating is driven by a consistent Earnings Performance and a very bullish Financial Metrics rating. Management is committed to maintaining capital at levels satisfactory to the rating agencies to preserve or exceed current ratings.
AFG repurchased 2.9 million shares of common stock in the 4th quarter of 2010 at an average price per share of $31.39 while paying out a dividend of $0.1625 per share in January, 2011. All the above actions taken by management are directly in the shareholders’ interests.
Analyst opinions are increasingly bullish regarding the company’s growth prospects. The company has grown its book value by 14% in 2010 alone and by 39% over the last 3 years. Shares have recently made new 52-week highs reaching levels last seen in June 2007.
Based on WikiWealth’s Intrinsic Value analysis, shares are deeply discounted at current prices. We believe the current rally is real and the stock should continue to outperform in 2011.
Axis Capital Holdings Ltd (AXS): 36.27
In the 4th quarter of 2010, AXS earned $1.41 per share handily beating average analyst estimates of $1.21 per share. Analysts have raised their 2011 estimates resulting in a very bullish Expert Opinions rating. Consistent earnings and a low P/E ratio on projected 2011 earnings lead to a very bullish Earnings Performance rating.
Early this month, the company announced that the Board of Directors had approved a quarterly dividend of $0.23 per common share to be paid out in April. The company has increased its book value per share at a compound rate of 16.5% over last 5 years. This strengthens its balance sheet, accounts for a very bullish Financial Metrics rating and bolsters an already bullish rating.
The stock price is making higher highs and we believe this momentum will continue throughout 2011 as the company marches towards its 5-year highs.
Everest Re Group Ltd (RE): 87.20
Abundant free cash flow and high profit margins contribute to Everest Re Group’s bullish Financial Metrics rating. In the 4th quarter of 2010, the company posted EPS of $3.80 beating analyst estimates of $2.97 by over 25%.
In 2010, management repurchased 5.1 million shares at an average price of $78 per share while increasing book value per share by 12% in the same period. In February, the company’s board of directors announced a dividend of $0.48 per share to be paid at the end of March.
RE is backed by value investor Mason Hawkins who owns close to 10% of the company, and has a strong track record of outperforming the market. A low P/E ratio on 2011 projected earnings and a bullish Price Trend ROC round up a bullish rating.
Although the stock price is has recently made a new 52-week high, it is still 22% off its 5-year highs. This, along with Wikiwealth’s Buffett Potential Price of $251**, encourages us to believe that the stock price will continue its current rally in 2011 and could exceed the 5-year highs last seen in July 2007.
Navigators Group Inc (NAVG): 52.10
The company’s net income in the 4th quarter of 2010 tripled vs. net income in the same period in 2009. Consistent earnings growth leads to a bullish Earnings Performance metric.
As reflected in its ‘A” rating by the leading agencies A.M. Best and Standard & Poor’s, Navigators Group has a very healthy balance sheet with strong cash flows leading to a bullish Financial Metrics rating. Shares are in a rally mode and both near and intermediate term technical indicators suggest that this rally has legs.
Bullish Price Trend and a strong Volume Trend along with very strong Money Flow activity contribute to a very bullish Price Volume component which adds to its bullish rating. We believe the stock price will continue its upward move in 2011 and any pullbacks from these levels are excellent buying opportunities.
WellPoint Inc (WLP): 67.99
Unlike the above companies which operate in the Property and Casualty Insurance space, WellPoint is a Health Benefits company. However, like the others, it is also making new 52-week highs while still offering upside potential based on WikiWealth’s Buffet Intrinsic Value analysis.
Management is garnering analyst confidence by providing a much clearer, conservative outlook than it has in the past. Healthcare reform has helped clarify earnings and cash-flow potential leading to a first time quarterly dividend of $0.25 per share to be paid out to shareholders starting in the 1st quarter of 2011.
The company’s board of directors has also authorized a stock repurchase program of $1.6 billion this year. Analysts have raised their earnings estimates leading to a very bullish Expert Opinions metric.
Consistent earnings growth, bullish Price Trend and a strong Money Flow activity add to our bullish rating. WLP should continue its uptrend in 2011. Buy this stock on weakness.
For more in-depth analysis on these stocks, please click here.
* Business Value - the most heavily weighted factor in the 20 factor Chaikin Power Gauge rating, Business Value measures free cash flow per share on a relative basis vs. 3000 stocks and is similar to EV/FCF calculations.
** Buffett Potential Price – this price is derived from the intrinsic value calculations developed by WikiWealth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.