Exciting Investment Ideas in "Stodgy” Industries
Jeff is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When turnaround trends take place in industries that have been considered boring or unappealing for extended periods of time, such events can be rather explosive. A good example of this is the PowerShares KBW Insurance Portfolio (NYSEMKT: KBWI)), an ETF that holds only insurance-company stocks. The inception date is Nov. 1, 2011 and the posted one-year return is approximately 28.9%.
The release of the PowerShares KBW Insurance Portfolio appears to be timely. The underlying index does have a five-year track record of average returns. In fact this index has outperformed the S&P Insurance index, which supports the creator’s ability to design and back-test a portfolio. Below are an allocation chart and a price chart of the PowerShares KBW Insurance Portfolio. I am seeing a trend reversal in an industry that tends to stay on track, after the track is formed.
The largest position held in the PowerShares KBW Insurance Portfolio is Travelers (NYSE: TRV). Travelers was once part of Citigroup's family of companies that were the foundation of the mega-financial supermarket concept. Travelers was one of the early spin-offs from this family.
As of May 2, there is a 7.7% weighting of the fund in Travelers, and the price chart below shows a nice uptrend. The first quarter of 2013 is filled with positive news for this company. Net earnings per share are up by 11% from the same quarter last year, underwriting margins in all lines of insurance are improving, and rate gains continue to exceed claims losses. All in all I think this shows that Travelers' management is guiding this once-stodgy property and casualty insurer to new heights.
The second largest position (7.3%) of the PowerShares KBW Insurance Portfolio goes to another property and casualty insurer, Chubb (NYSE: CB). Chubb is reporting similar stellar results. First-quarter 2013 earnings per share were up 36% from the same period last year. Chubb has repurchased approximately 3.9 million shares and John D. Finnegan, chairman, president, and CEO, states that Chubb is off to great start in 2013. Just look at the price chart below to see that this is another terrific story.
The number three spot goes to MetLife (NYSE: MET). MetLife is an insurer that underwrites a wider range of lines than the two previously mentioned companies. The holdings in the PowerShares KBW Insurance Portfolio are approximately 7.2%, and the company's developments are good, yet do not show the same bang as the other top holdings do.
Operating earnings per share for the first quarter of 2013 were up 8% from the same period last year. One item that draws attention is that the sales of variable annuities in the US are down 29%. There will be more similar stories as this type of insurance product is being “pulled from the shelves” and replaced with newer ones. With all of these key points, I think better opportunities for individual investment in insurers can be found elsewhere.
The fourth spot of the PowerShares KBW Insurance Portfolio goes to Aflac. Needless to say, the duck we all see on television speaks for Aflac. What is not well known is that Aflac has a strong presence in Japan. This places a higher emphasis on understanding and analyzing how well Aflac’s management handles the significant currency exposure.
First quarter 2013 earnings reported flat gross revenue, while net diluted earnings per share were $1.90 versus $1.68 from the same period last year. The price chart below shows a sideways trend in the recent four months, and it remains to be seen if a breakout to the upside will occur. This is another stock that seems to be on the fence and may be moving to the greener side. However, with all the concerns about exposure to Japan, I find it hard to give this a clear green light.
While each of the underlying stocks in the PowerShares KBW Insurance Portfolio may generate a variety of opinions, in this case the power of a concentrated index of 24 stocks may remove some of the stigmas attached to any one stock. In my opinion, this is new ETF was brought to the market at a very good time and will give the investor a focused holding in the insurance sector.
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Jeff Stouffer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!