Why Equitable Holdings Stock is Undervalued - Cabot Wealth Network

Why Equitable Holdings Stock is Undervalued

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Today, I want to tell you about one of my favorite long-term value stocks: Equitable Holdings stock. But first, let’s talk about the importance of having a few long-term value stocks in your portfolio…

The Advantage of Owning Long-Term Value Stocks


We can measure it precisely in increments ranging from the tiniest fractions of a second to the galactic year. We plan our time: our days and weeks, our summers, sometimes a full year or longer.  Almost every room and vehicle has a clock, and our always-at-hand phones have the time and day featured prominently on the screen. However, despite the fact that time is fully infused into our lives, it is difficult to fully understand. Sometimes it goes by slowly, when we are waiting for an anticipated event. Other times it flies by so quickly that a week-long vacation can seem like it’s over only moments after it started.

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Time is not well-understood on Wall Street, either. While as much as 90% of a stock’s value is driven by profits in Years 2 and beyond, the stock market is notoriously impatient. The average time horizon for Wall Street analysts is usually the next quarterly earnings report, while for television pundits it often seems that the horizon is the closing bell.

Long-only fund managers have their bonuses based on one-year performance while hedge fund managers frequently have quarterly or monthly bonus horizons – so their near-term sentiment can move share prices sharply based on daily news flow and general “risk-on/risk-off” attitudes.

While buying stocks that ride near-term sentiment can produce remarkable profits (as holders of Tesla (TSLA), Amazon (AMZN) and other momentum stocks would certainly agree), there can be real merit to holding stocks of companies with long-term value that is underappreciated by the market. Sentiment and market conditions can change quickly. Diversifying by time horizon can add valuable stability and profits when the momentum shifts.

These types of long-term value stocks tend to have uninspiring near-term performance, sometimes drifting slowly downward or having a 5% drop in a day. Stocks like these succumb to two traits common in professional and part-time investors alike: strong aversion to any losses, and the tendency to check on the daily movements of owned stocks. When combined, perhaps it is not surprising that slower-moving bargains are ignored.

Yet among these out-of-favor stocks are quality companies where capable managements are working hard to build value. Sometimes there are issues that cloud the near-term story but will likely be remedied. In others, the companies are hidden among less interesting industry peers. Occasionally, the market is waiting for several quarters to pass following a transition (new CEO or spin-off, for example).

Investing in long-term value stocks takes patience that the market tends not to have. As meaningful updates may only occur on quarterly earnings calls, for most of the time investors have little information to act upon, making it harder to have that patience.

I once heard a phrase that humorously clarifies a common investor error: If a cake takes 35 minutes to bake, you can’t pull it out of the oven after 20 minutes in frustration that it is a gooey mess and thus a failed cake.

Equitable Holdings Stock: Out-of-Favor Quality

As the new chief analyst for the Cabot Undervalued Stocks Advisor advisory, I focus on these kinds of long-term value stocks. One of my current “Strong Buy” recommendations is Equitable Holdings (EQH).

Equitable owns two principal businesses: Equitable Financial Life Insurance Co. and a majority (65%) stake in AllianceBernstein Holdings L.P. (AB), a highly respected investment management and research firm.

Equitable, with a 161-year history, was acquired by French insurer AXA in 1992. Starting in 2018, AXA began to spin off Equitable with an initial public offering of part of its ownership. Part of the motivation behind the spin-off was to fund AXA’s $15 billion acquisition of insurer XL Group Ltd. Through subsequent stock sales, AXA currently owns less than 10% of Equitable. With its new-found independence, Equitable is free to pursue opportunities that it was unable to as a subsidiary of AXA.

The company is well-capitalized and has significant liquidity. Its diverse, high-quality investment portfolio is hedged against adverse changes in interest rates and equity markets. AllianceBernstein’s assets under management (AUM) as of June was $600 billion. While near-term profits will decline due to higher mortality costs, they will likely recover next year. Equitable expects to continue delivering a 50-60% payout ratio through dividends and share repurchases. The shares offer a 3.5% dividend yield.

Equitable Holdings stock is undervalued.EQH shares are undervalued, with a 2020 P/E of 4.6x. Like many insurance companies, investors also value Equitable Holdings stock on a book value basis. With its $37.78 in per-share book value, EQH trades at 52% of book value, a significant discount. EQH shares also trade below their 20 IPO price, which was a disappointment at the time relative to the 24-27 price range that bankers had targeted. Since then Equitable has arguably become a better company and any sale of AllianceBernstein is likely to unlock further value.

To learn what other long-term value stocks I’m currently recommending in my Cabot Undervalued Stocks Advisory, click here.

Bruce Kaser - Photo

Undervalued Stocks Expert Bruce Kaser

Bruce has more than 25 years of value investing experience, managing institutional portfolios, mutual funds, and private accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company. Now he is helping his Cabot Undervalued Stocks Advisor readers find those undervalued stocks that let you buy low and sell high!

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