Although we’re now about five years removed from the sub-prime mortgage crisis and ensuing financial collapse, financial stocks are still in the doghouse as far as many investors are concerned. They have valid reasons: it has taken years for the large banks to deleverage their balance sheets, there remains a possibility of government action against those responsible for the financial crisis (S&P is just now being sued for giving mortgage-backed securities misleading ratings) and resentment toward large financial institutions still lingers.
But all those factors are fading, gradually, and many financial stocks were able to begin a comeback in 2012. Bank of America’s (BAC) stock gained over 100% in 2012, for example.
As I’ve written about here before, I think 2013 will be a great year to be invested in recovering financial stocks. And today I have two ideas for you from the insurance sector. The first is a recommendation from George Putnam, Editor of The Turnaround Letter, whose turnaround-stock-picking ability led him to the number-one spot in our Top Picks challenge last year (his 2012 Top Pick, OfficeMax, OMX, gained over 100% for the year). This month, he featured a new turnaround idea from the insurance industry. Here’s his recommendation, from The Turnaround Letter via the latest Investment Digest:
“Founded in 1864 as the National Union Life and Limb Insurance Company, MetLife, Inc. (MET) has grown into the largest life insurance company in the U.S. It currently has about $4.2 trillion of life insurance in force. The stock rose gradually to a high of 71 in 2007. Then, like many financial companies, MetLife saw its stock get hit hard in 2008, and it has never really recovered.
“MetLife has long had one of the strongest franchises and best-recognized brands in the life insurance business. The company is now shedding other business lines so that it can focus more on its core competency. For example, MetLife recently completed the sale of its banking business to GE. This not only removes the distraction of the banking business, but it also gets the company out from under the more stringent capital requirements that apply to bank holding companies.
“The company is also shifting its business mix to improve its risk profile. One example of this is management’s decision to move away from the capital-intensive and market-sensitive variable annuity business. In addition to its strength in the U.S., MetLife has a substantial and growing presence abroad. It is particularly strong in emerging markets, which are likely to offer much greater growth opportunities than the U.S. and Europe. The company greatly boosted its global and emerging-market exposure when it purchased AIG’s ALICO unit in 2010.
“Despite the strength of the franchise, the stock looks cheap on a valuation basis as investors continue to spurn old-line financial companies. The stock currently trades at just 0.62 times book value, compared to well above 1.0, where it traded for many years before 2008. Moreover, the stock has a forward price/earnings ratio of only about 7x.
“While MetLife has extricated itself from bank holding company regulation, it is still subject to the non-bank Systemically Important Financial Institution rules created by the Dodd-Frank legislation. Since those rules are still evolving, the company has been cautious about buying back stock or increasing its dividend. However, we expect MetLife to take one or both of those shareholder-friendly steps once the regulatory fog begins to clear. We believe that Wall Street’s current aversion to financial stocks creates an opportunity to buy a powerful and growing insurance franchise at a depressed price. We recommend buying MetLife up to 45.”—George Putnam, III, The Turnaround Letter, February 2013
In addition to its turnaround potential, MetLife pays a dividend (just switched from quarterly to annual) that amounts to a current yield of about 2.0%.
Our second insurance stock today has already booked some impressive gains since its 2008 low, but Argus analysts John Eade and Jim Kelleher think it has more upside ahead of it. Here’s their recommendation, from the latest Investment Digest:
“Travelers Cos. Inc. (TRV)—Long-term profitability trends are solid at this blue-chip insurance company and Dow component, and recent quarterly results, which had been erratic, have improved as management has been able to implement rate hikes. The balance sheet remains strong. Management is heavily invested in the stock. The company raised its dividend by 12% in June and has plans to step up its buyback program.
“On valuation metrics, the shares trade in line with industry averages. Our 12-month target price of $85 (raised from $82) assumes a modest premium based on our EPS forecast for 2013. ... Travelers’ stock tends to be less volatile than those of peers. The beta on the shares is 0.76, indicating that TRV returns are almost 25% less risky than the market.”—John Eade and Jim Kelleher, CFA, Argus Weekly Staff Report, January 28, 2013
Like MET, TRV pays a quarterly dividend for a current yield of about 2.3%. The yield and low volatility should attract more investors to this blue-chip stock over time.
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
P.S. We released our Dick Davis Investment Digest Top Picks Issue for 2013 last month but it’s not too late for you to profit from the recommendations. Check out some of the huge gains our subscribers earned from last year’s Top Picks issue:
- Office Max (OMX): UP 113%!
- Lennar Corp. (LEN): UP 78%!
- Holly Frontier Corp. (HFC): UP 67%!
- Royal Bank of Scotland Preferred (RBS-Q): UP 47%!
- Tata Motors (TTM): UP 34%!
Turnaround situations, small-caps, revolutionary growth stocks—that’s just some of the great ideas you’ll find in Dick Davis Investment Digest.
