Insurance Sector

  • 31 Aug
    How much should value investors pay for PRU?

    How much should value investors pay for PRU?

    Every time I start evaluating a stock as a potential investment, one of the first questions I have to answer for myself isn’t just about what the stock is doing right now; it’s about what price I think the stock should be at to represent an excellent value. As a committed value hunter, it really isn’t enough for me to say that a stock has great fundamental strength, or that its trend is moving the way I want it to right now. I also need to find a compelling reason to believe the stock should be worth significantly more down the road than it is today.

    Of course, fundamental strength and a stock’s current trend do play a role in that evaluation – but not in exactly the way most investors think. Over the years, I’ve often heard people equate value investing with contrarian investing, and maybe that’s one of the reasons I’ve come to appreciate the approach as much as I do. One of the basic ideas of contrarian investing suggests that the best investment opportunities lie in the areas that the market isn’t paying attention to right now; you’re going against the grain of the rest of the market and its trends. That’s one of the reasons that downward trends don’t concern me as much as they would if I were focusing primarily on shorter-term methods like swing or momentum trading.

    The truth is that for me, downward trends represent one of the easiest ways to start spotting good value opportunities. That’s a primary reason that just about any time I write about a stock, you’ll usually see that it’s been following a downward trend for a significant portion of time. Sometimes, downward trends are driven by significant problems within a company’s business, problems that threaten the company’s well-being and ability to survive in an increasingly competitive world. Sometimes, however, those trends are driven more by external macroeconomic factors, or simply by negative investor sentiment that ignores the underlying strength of the stock’s business. Those are the opportunities that I look for, because those downward trends really just mean that the stock’s current price could be a bargain compared to where it should be.

    Prudential Financial, Inc. (PRU) is an interesting study in value analysis. Like most stocks in the Financial sector this year, the stock has struggled to form any significant upward momentum; after peaking at around $127 in late January, the stock has dropped back significantly, touching an eight-month downward trend low at around $93 in the beginning of July. That’s a decline of almost 27%, which puts the stock squarely in its own bear market territory. Lately, however the stock has been stabilizing a bit and even looks like it is starting to build some bullish momentum. That, along with the stock’s mostly solid fundamental profile creates an interesting value proposition.

    Fundamental and Value Profile

    Prudential Financial, Inc., is a financial services company. The Company, through its subsidiaries, offers a range of financial products and services, which includes life insurance, annuities, retirement-related services, mutual funds and investment management. The Company’s operations consists of four divisions, which together encompass seven segments. The U.S. Retirement Solutions and Investment Management division consists of Individual Annuities, Retirement and Asset Management segments. The U.S. Individual Life and Group Insurance division consists of Individual Life and Group Insurance segments. The International Insurance division consists of International Insurance segment. The Closed Block division consists of Closed Block segment. The Company has operations in the United States, Asia, Europe and Latin America. PRU has a current market cap of about $41 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by a little over 44%, while revenue decreased almost 3%. That isn’t a great indication, but it is actually better than the results most companies in the insurance industry have reported, where earnings fell over the same period.
    • Free Cash Flow: PRU’s free cash flow is very strong, at more than $15.4 billion. This number has more than doubled over the last year, when Free Cash Flow hit a bottom at around $6 billion.
    • Dividend: PRU’s annual divided is $3.60 per share, which translates to a yield of 3.65% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for PRU is $116.53 and translates to a Price/Book ratio of .84 at the stock’s current price. The stock’s historical average Price/Book ratio is .98, suggesting the stock is almost 17% undervalued, with a long-term target price around $114 per share. The picture gets more interesting when you factor in the stock Price/Cash Flow ratio, which is currently running about 28.5% below its historical average. That increases the stock’s long-term target price to about $126.50, which puts the stock within spitting distance of the all-time peak it hit in January at around $127 per share.

    Technical Profile

    Here’s a look at the stock’s latest technical chart.


    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s upward trend until January of this year; it also provides the basis for the Fibonacci retracement lines shown on the right side of the chart. The stock’s downward trend from January to this point is easy to spot, and its stabilization range between support around $96 and resistance around $102 is well-illustrated by its price activity over the last few weeks within the 38.2% and 50% retracement lines. This a good early indication the stock’s current downward trend could be about to reverse; the longer that range holds, the more likely a strong move back to the upside becomes. In the same sense, a break at any point above the $102 level, accompanied by strong buying volume would provide a visual confirmation that the stock is actually in the early stages of a new upward trend. A break below support at $96, however should put investors on notice that the downward trend remains in force, with a push below $92 acting as a signal that trend should extend into an even longer timeframe.
    • Near-term Keys: If you like the stock’s value proposition at its current price, and are willing to hold the stock for the long-term, you could do much worse than to buy a high-dividend paying stock at the kind of discount PRU is offering right now. If you’re looking for a way to work with shorter-term strategies, you would need to wait for a break above $102 to buy the stock or start working with call options, or a drop below $92 to short the stock or start using put options.

  • 10 Jul
    PFG could be a winner if Financial stocks come back into favor

    PFG could be a winner if Financial stocks come back into favor

    Since the beginning of the year, the Financial sector has lagged the rest of the market; as measured by the SPDR Financial Select Sector Fund (XLF), as of this writing it is down about 10% from its late January highs, and while the broad market appears to be recovering some bullish momentum this week, financial stocks remain mostly lower, constrained by the downward trend they’ve been following for the last six months. While interest rates have been rising for the last year or so, those gradual increases have kept rates near historically low levels, a fact that puts pressure on a variety of asset management offerings from savings accounts to certificates of deposit, bonds, and interest-bearing insurance products like annuities. I believe that fact has played a role in the sector’s underperformance. Insurance companies have also suffered not only from narrow margins resulting from low interest rates, but also from tepid revenues; that is a trend that could change, but is mostly expected to do so gradually.

    The best opportunities in the Financial sector for investors, I think come from companies that can offer a balanced mix of products between asset management (including investment, savings and retirement) services and insurance services. Principal Financial Group (PFG) is a good example of one of those kinds of companies. The other fact is that a lot of stocks, like PFG in the Insurance industry have really been beaten down over the last six months, far more than the -10% I referred to at the beginning of this post. PFG, for example is down about 38% from its late January high, and that is a level that I think is starting to offer a pretty nice value proposition. Let’s take a more detailed look.

    Fundamental and Value Profile

    Principal Financial Group, Inc. is an investment management company. The Company offers a range of financial products and services, including retirement, asset management and insurance. Its segments include Retirement and Income Solutions; Principal Global Investors, Principal International; U.S. Insurance Solutions, and Corporate. The Company offers a portfolio of products and services for retirement savings and retirement income. The Company’s Principal Global Investors segment manages assets for investors around the world. The Company offers pension accumulation products and services, mutual funds, asset management, income annuities and life insurance accumulation products. The Company’s U.S. Insurance Solutions segment provides group and individual insurance solutions. It focuses on small and medium-sized businesses, providing a range of retirement and employee benefit solutions, and individual insurance solutions to meet the needs of the business owners and their employees. PFG has a current market cap of $15.7 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased about 10%, while sales decreased almost 6%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations. The company’s Net Income versus Revenue was almost 14% in the last quarter, which indicates their margins are pretty healthy.
    • Free Cash Flow: PFG’s Free Cash Flow is strong, at about $4.2 billion. This number has improved from a little under $3.5 billion a year ago.
    • Debt to Equity: PFG has a debt/equity ratio of .26, which is conservative. The company has more than $4.9 billion in cash and liquid assets, which means they they have plenty of liquidity, against only about $3.2 billion in total long-term debt. Cash and liquid assets have improved over the past year from about $3.3 billion.
    • Dividend: PFG pays an annual dividend of $2.08 per share, which at its current price translates to a dividend yield of about 3.8%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for PFG is $42.79 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.27. The average for the Insurance industry is 1.2, while the historical average for PFG is 1.54. That might not sound like much of a discount, but it actually indicates the stock is a little more than 17% below the $66 level that a rally to par with its historical average would provide. That’s pretty attractive and offers a nice opportunity from a value-oriented perspective if the Financial sector comes back into favor as I’ve seen some analysts suggest should happen soon. If the stock’s downward trend continues, that proposition is only likely to improve.

    Technical Profile

    Here’s a look at the stock’s latest technical chart.

    • Current Price Action/Trends and Pivots: The red diagonal line on the chart highlights the stock’s downward trend since January, and also provides the range needed to calculate the Fibonacci retracement lines shown on the right side of the chart. The stock’s gradual, but consistent stair-step pattern since February is a good indication of the downward trend’s strength. It’s also pretty easy to the stock’s recent bullish strength as it has rebounded from a trend low at around $52 per share to its current price level. The downward trend will remain in place until and only if the stock can break the $61 level marked by the 38.2% retracement line. A push above that point would likely mark and important reversal point. If the stock breaks below its current support around $52, its next most likely support level would be around $49; continued bearish momentum beyond that point could push the stock as low as $45.
    • Near-term Keys: If the stock’s current bullish momentum holds, and the stock can break above immediate resistance around $56, the stock should have little trouble rallying near to $61 per share; that could be a decent opportunity for a bullish short-term trade by buying the stock outright or using call options. A drop below $52 could act as a good signal for a bearish trade using put options or by shorting the stock.

  • 20 Dec
    Be Overweight In These Sectors In 2017

    Be Overweight In These Sectors In 2017

    • Increasing interest rates make earnings growth unlikely and increase the probability for a decline of the S&P 500.
    • To beat the S&P 500, you have to invest in sectors that offer a better risk reward ratio than the S&P 500.

    Don’t Go For 10 To 20 Percent Returns In 2017

    With the S&P 500 yielding 3.85% going into 2017, stocks in general are currently an investment vehicle that gives you a small and limited upside with a potentially large downside.

    We know that the FED plans to raise interest rates another three times in 2017. If that happens, the investments people consider most secure—like treasuries, dividend paying blue-chips or REITs—will be hit the hardest because as required yields go up, their asset prices will go down. Therefore, the best way to prepare for 2017 is to position yourself so that if the FED raises rates, your upside is far bigger than 3.85% and your downside far smaller than the potential downside of the currently overvalued stock market. More →