By Timothy Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month
From Cabot Wealth Advisory 12/13/10 Sign up for free Cabot Wealth Advisory
Insurance stocks have been recovering well since the recession. This one is a Cabot Benjamin Graham Value Letter selection. It’s Reinsurance Group of America (RGA), which yields 0.9%. Revenues grew every year of the past decade until 2008,when they slipped 1%. But they roared back in 2009 for a growth rate of 24%, and this year revenues have averaged 18% growth, while earnings have averaged 12% growth.
“Reinsurance Group is the second largest provider of life reinsurance in the U.S. The company offers life, annuity, critical care and group reinsurance, and also guarantees insurance contracts for insurance and other financial companies. Reinsurance Group sells its products in 26 countries around the world, and acquired ReliaStar Life Insurance in January 2010. We believe strong growth from RGA’s international operations as well as a boost from the ReliaStar purchase will boost EPS by 14% in 2010. The company’s shares are undervalued at 7.2 times current EPS with a 1.0% dividend yield. RGA shares sell at 0.78 times current book value. The balance sheet is strong, and the Standard & Poor’s Quality Rank is A-. We fully expect RGA’s stock price to increase to our Minimum Sell Price of 70.69 during the next one to two years.”
Back when Roy wrote that, the stock was selling at 48. Now it’s 53, for a solid profit of 10%. And the Minimum Sell Price has been increased to 74.02, which would be a tidy 41% profit from here. But what you really need to know to buy with a Margin of Safety is Roy’s Maximum Buy Price, and you can get that by clicking HERE.
President, Chief Investment Strategist, Editor of
Cabot Stock of the Month
Timothy Lutts heads one of America’s most respected independent investment advisory services, publishing eight newsletters to more than 165,000 subscribers around the world. Tim leads a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems. Under his leadership, Cabot has been honored numerous times by both Timer Digest and the Hulbert Financial Digest as among the top investment newsletters in the industry. Tim also edits Cabot Stock of the Month.
From Cabot Wealth Advisory 2/25/10 Sign up for free Cabot Wealth Advisory e-newsletter
Benjamin Graham is known as the father of value investing. He influenced many modern investors, including Warren Buffett. Ben Graham wrote books, taught investment courses and created several methodologies to help investors evaluate stocks.
I have used one of Benjamin Graham’s methods for the past seven years in the Cabot Benjamin Graham Value Letter with great success. The method is based upon minimum price-to-earnings ratios, price-to-book value ratios and measures of quality. The full description of this analysis can be found in Benjamin Graham’s book, “The Intelligent Investor.”
Mr. Graham suggested that investors should buy stocks that fit all of the following criteria:
(1) The current price-to-earnings (P/E) ratio is 9.0 or less.
(2) The price-to-book value (P/BV) ratio is 1.20 or less.
(3) The long-term debt-to-current assets ratio is 1.10 or less.
(4) The current assets-to-current liabilities ratio is 1.50 or more.
(5) Earnings per share growth during the past five years is 1% or more.
(6) The company currently pays a dividend.
(7) The Standard & Poor’s Quality Rank is B+ or better.
The list of seven requirements is somewhat long, but several stock screening sites, as well as your favorite broker, can find stocks that meet most or all of them.
One of the stocks that currently stands out, because it easily fits all of the criteria, is Reinsurance Group of America (RGA).
Reinsurance Group of America is a reinsurer and offers life, annuity, critical care and group reinsurance. The company guarantees insurance contracts for insurance and other financial companies. RGA sells its products in 26 countries around the world. The reinsurance industry has declined during the past several years because of the availability of competing reserve financing solutions including derivatives. I believe this downward trend has begun to reverse recently because of the turmoil in the financial markets and the problems with derivatives.
Reinsurance Group is in position to capitalize on the significant growth opportunities provided by the resurgence of the reinsurance industry in the U.S., as well as China and India. The company has over $2.2 trillion of life reinsurance in force backed by a strong balance sheet with conservative bond investments. Revenues increased 15% in the quarter ending 12/31/09, which was well above our estimate. Earnings per share were up 17%, which also exceeded our estimate. I believe the reversal has begun and that EPS growth of 14% is realistic in 2010.
RGA is the second largest provider of life reinsurance in the U.S. The company’s shares are undervalued at 8.1 times current EPS with a 1.0% dividend yield. RGA shares sell at 0.86 times current book value. The balance sheet is strong, and the Standard & Poor’s Quality Rank is A-. Reinsurance Group’s shares offer a solid investment choice for dividend income and stock price appreciation during the next two to three years.
Editor’s Note: You can read more about the Benjamin Graham system in the Cabot Benjamin Graham Value Letter. There you’ll find buy and sell advice for dozens of excellent value stock recommendations from J. Royden Ward each and every month. Roy applies the strategy of the father of value investing to find the market’s best undervalued stocks. And he will tell you exactly when to sell, too. Roy’s eight sell recommendations during the last four months netted his investors average gains of 36%. Remarkable! Don’t miss out on his next recommendations … click here now to get started today!
J. Royden Ward
Editor of Cabot Benjamin Graham Value Letter
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the Value Letter.