4 Overlooked Financial Stocks To Consider Now
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
American International Group (NYSE: AIG) was once among the largest, most profitable and most complicated of all financial companies. Courtesy of the recession and record setting bailouts, AIG is today a small fraction of what it was, but that still makes it a major international insurance holding company. At its height, adjusted for stock splits, AIG had a book value of nearly $800 per share, and earned up to $15 billion in annual profits. Its investment portfolio virtually evaporated in 2008, and the U.S. Treasury loaned so much money to AIG that taxpayers at one point owned 92% of the company. But the U.S. Treasury recently sold its remaining 16% stake in AIG, 234.2 million shares at $32.50 per share, for a profit of $22.7 billion. In light of these recent developments, it's time to look at AIG once again.
As it stands now, AIG operates three segments; its life/health insurance unit, formerly known as SunAmerica, and its property/casualty insurance unit, formerly known as Chartis, and its aircraft leasing unit. The latter, International Lease Finance is in the early stage of the process of having a 90% stake of it sold to a Chinese Consortium for $5.5 billion. That is a sizable amount, but still below the pro-rated book value of the unit. AIG has been trying to sell or spin off the unit for two years though, so it simply is taking the best deal it could find in the here and now.
Any insurer's goal is to have an underwriting profit, or combined ratio of under 1.00. That is, its premiums earned hopefully exceed its underwriting losses plus expenses. If the combined ratio shows that sort of gross profit, any investment gains in the insurer's portfolio become “dessert.” In the third quarter of 2012, AIG's property casualty insurance unit had a combined ratio 1.05 but 0.36 of that was from catastrophic losses. The former SunAmerica has become steadily less focused on life insurance, and more focused on retirement planning in recent years. About 2/3 of the unit's $826 million in third quarter operating earnings was from the retirement planning side. That $826 million was nearly double the $471 million from the unit's third quarter of 2011.
Overall, AIG is the strongest it has been in over five years. It earned $1.6 billion in the third quarter, or $1.00 per share. The fourth quarter will be a struggle as catastrophic losses from Sandy are already pegged at $1.3 billion, and the probable sale of the Aircraft Leasing business will further erode AIG's overall earning power. But it is hard for the speculative, value oriented investor to ignore the 5 year PEG being at 0.43, and a price to book ratio at the close of the third quarter of 0.48. AIG is still fraught with peril, but if it stabilizes and trades closer to book value, watch out.
Berkshire Hathaway (NYSE: BRK-B) is at its core an insurance holding company, with companies such as personal lines carrier Geico and two large reinsurance units. But what is known best for is as a holding company of blue chip stocks hand-picked by CEO Warren Buffett and his team. It had an excellent third quarter, as insurance operations were solid, and investment gains were plenty. The company also has $40 billion on its balance sheet, with virtually no debt.
Buffett and company have been spending some of that cash in the second half of this year with purchases of Prudential Real Estate and Oriental Trading. In Berkshire's big capitalization portfolio, increases were made in companies including General Motors (GM), Wells Fargo (WFC) and National Oilwell Varco (NOV). New positions were established in Deere (DE) and Precision Castparts (PCP). Positions in some big capitalization laggards like Johnson and Johnson (JNJ) and CVS Caremark (CVS) were either sold out or greatly reduced. In all, it seems clear more resources were put into energy and infrastructure, and away from retail and consumer goods.
On the earnings front, analysts are looking for earnings of about $5.20 per share this year, up about 20% from 2011. That sort of growth is not sustainable for a company like Berkshire Hathaway, but there is little reason to doubt its ability to grow its earnings and book value by roughly ten percent per year. Other than the fact that the company does not pay a dividend, it is hard to find a better fit for the conservative investor than Berkshire Hathaway.
Loews (NYSE: L) is a leading diversified company, with holdings including a majority stake in CNA Insurance (CNA), along with hotel properties and controlling stakes of major energy companies such as Diamond Offshore Drilling (DO) and related businesses. In some ways, Loews is like a miniaturized Berkshire Hathaway. It had $44 billion in cash at the close of the third quarter, and sells substantially below its book value of near $51 per share. But Loews has much more narrowly held interests, and that lack of diversification leads to a beta showing more than three times more volatility in Loews than in Berkshire Hathaway.
Loews has become very energy focused, and if you believe that natural gas and offshore drilling are good bets, but would like to hedge that with some commercial insurance and real estate exposure, Loews might be for you. As for me, if I want an energy stock, I will buy one. And if I want one diversified financial holding, it would be Berkshire Hathaway.
BlackRock (NYSE: BLK) is of the world's largest publicly traded investment managers, managing assets of the largest institutions, and smallest retail clients, and everything in between with all manner of equity and debt offerings. It has been on quite a run, with five year average annual growth in its earnings and book value up by 23% and 57%, respectively. But while its revenues and profits continued to expand thus far this year, the company's driver of revenue growth has become its exchange traded fund offerings, known as iShares. These come with a lower profit margin than Blackrock's traditional offerings.
Blackrock is coming off a solid third quarter, with a 4% revenue rise leading to a 13% increase in earnings from the third quarter of 2011, to $3.65 per share. This equity is likely in continue increasing earnings in the low double digit range going forward, and with a reasonable 1.16 PEG and a solid 3.1% yield makes a fine choice for the conservative investor. Beware though the stock has made a substantial run up from about $160 per share since summer, and one might want to wait for some correction before committing to an investment.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of American International Group, Berkshire Hathaway, and Loews and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group, BlackRock, and Berkshire Hathaway. 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!