By Joe Escalada
Financial stocks are feared by many as the embodiment of Wall Street’s most dangerous sins: leverage, complex capital structures, over-modeling, and assets with no liquidation value. Despite these fears, many financial companies are more business than complex derivative, with operations more reminiscent of Main Street than Wall Street. With Bank of America (BAC) and Citigroup (C) taking all the financial headlines these days, we took a look at some simpler, safer financial stocks worth considering.
Though sometimes thought of as financial companies, Berkshire Hathaway Inc. (BRK.A) and Leucadia National Corp. (LUK) are holding companies, essentially conglomerates and partial owners of other companies you know. Leucadia owns Conwed Plastics, Idaho Timber, Keen Energy Services, ResortQuest, Crimson Wine Group, Hard Rock Hotel and Casino, Sangart, Berkadia Commercial Mortgage, HomeFed, Jefferies & Company, and Fortescue Metals Group. Berkshire has an even longer list of holdings, including GEICO and several other insurance companies, reinsurance companies like Nederlandse Reassurantie Groep, Acme Brick Company, Dairy Queen, Cort Furniture, See's Candies, Fruit of the Loom, Helzberg Diamonds, American Express Co. (AXP), Bank of America, The Coca-Cola Company (KO), Comcast (CMCSK), ConocoPhillips (COP), Costco Wholesale (COST), Diageo (DEO), Johnson & Johnson (JNJ), Kraft Foods (KFT), USG (USG), U.S. Bancorp (USB), The Washington Post Company (WPO), Wells Fargo (WFC), and many others. Leucadia has been referred to as a mini-Berkshire Hathaway, and the success of its executives Ian Cumming and Joseph Steinberg rival Warren Buffett’s.
Both firms are attractively priced by most metrics, though Leucadia is cheaper. Berkshire has a price-to-book ratio of 1.05, a price-to-sales ratio of 1.19, and a price-to-earnings ratio of 14.20 (trailing twelve months). Leucadia sports a price-to-book ratio of 0.98, a price-to-sales ratio of 3.92, and a price-to-earnings ratio of 3.20 (trailing twelve months).
Insurance companies are financial firms that range from familiar to strange. Aflac Inc. (AFL) is a familiar life insurance and health insurance provider. It trades at attractive valuations with a price-to-book ratio of 1.39, a price-to-sales ratio of 0.80, and a price-to-earnings ratio of 9.58 (trailing twelve months). Similarly, The Travelers Companies, Inc. (TRV) is a familiar, diversified insurance provider for standard commercial and personal insurance policies. Like AFL, TRV shares are attractively priced. TRV sports a price-to-book ratio of 0.83, a price-to-sales ratio of 0.81, and a price-to-earnings ratio of 9.36 (trailing twelve months). Almost as familiar, Meadowbrook Insurance Group Inc. (MIG) provides specialty corporate insurance products like workers compensation, corporate auto, commercial property, and environmental insurance to large and small companies. MIG trades at a price-to-book ratio of 0.85, a price-to-sales ratio of 0.62, and a price-to-earnings ratio of 8.93 (trailing twelve months).
By comparison, the 'strange' companies are overpriced. Markel Corp. (MKL) provides specialty insurance products and reinsurance that are exotic and unseen on Main Street. Shares of MKL are more expensive than those of TRV or AFL. MKL trades at a price-to-book ratio of 1.14, a price-to-sales ratio of 1.53, and a price-to-earnings ratio of 15.62 (trailing twelve months). Insurance companies offering traditional products that trade at lower valuations are a better bet than a firm that sells more exotic products and trades at a higher valuation.
Information providers which supply the financial sector are often considered financial companies. Indeed, the risks associated with financial firms trickle down to information providers when their clients can no longer afford them. Thomson Reuters Corporation (TRI) is an information provider for many industries including finance, accounting, legal, science, and media. It trades at a price-to-book ratio of 1.27, price-to-sales ratio of 1.90, and a price-to-earnings ratio of 19.70 (trailing twelve months). Morningstar Inc. (MORN) provides investment research and advisory services. It trades at higher valuations with a price-to-book ratio of 3.35, a price-to-sales ratio of 4.74, and a price-to-earnings ratio of 30.37 (trailing twelve months). Though both companies are household names as well as industry standards, cautious investors ought to wait for attractive valuations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.