Here’s the most common question I receive from investors and radio show hosts: “Is the stock market overvalued?” What I’ve learned during my 29-year stock investing career is that (a) people don’t know how to tell if the market is overvalued, so they’re looking for guidance, and (b) the answer to that question is invariably multi-faceted. If you want a real answer to that question, and not just a sound bite, I can provide it. It may be the key to finding a few bargain stocks.
First off, we’re nowhere near one of those market tops that leads to market crashes. Here’s how to tell when we’re at that point: when people are talking about their stocks everywhere you go—cocktail parties, carpool line, bible study group—that’s when you know there’s nowhere to go but down because everybody’s already all in. There are no more buyers to drive prices higher.
We’re not at that point; not even remotely. We’re still in a market where your friends and family are warning everybody away from stocks, and almost never mentioning their personal stock ownership. So relax.
Next important question: “Where are the bargain stocks?” Ah, now that’s the key question that value investors should always be asking!
Plenty of Bargain Stocks Out There
I routinely screen many hundreds of stocks for earnings growth and valuation, and I’m having no trouble finding good bargain stocks to buy. The vast majority of those stocks are located in the financial and energy sectors. There are so many undervalued growth stocks within those sectors that you could probably select a good one to buy by throwing darts!
Here’s one bargain stock:
Assurant (AIZ) is a multi-line insurance company that underwrites mortgage and homeowner’s insurance, protection for consumer items (electronics, appliances, vehicles, credit), pre-funded funeral insurance and annuities. Assurant is based in New York City, and operates in North America, Latin America, Europe and Asia.
The company recently undertook a multi-year restructuring program, and is exiting the health insurance and employee benefit markets. Standard & Poor’s says, “AIZ has a solid track record of disciplined capital management, and the company’s balance sheet is prudently managed.”
Assurant reported a fantastic first quarter on May 3. Net operating income, as reflect in earnings per share (EPS) of $1.87, blew away the analysts’ consensus estimate of $1.52 per share. CEO Alan Colberg remarked, ““We are confident that growth in targeted areas and expense efficiencies will enable us to deliver on our 2017 earnings and capital deployment commitments …”
Earnings per share (EPS) are growing via increases in market share, expense savings and share repurchases. Prior to the first quarter report, Wall Street had expected Assurant to achieve $6.25 in full-year non-GAAP EPS. Analysts now expect EPS of $6.52 and $7.23 in 2017 and 2018 (December year-end), representing EPS growth of 45.9% and 10.9%.
The 2017 and 2018 price/earnings ratios (P/Es) are 15.9 and 14.3.
The company is aggressively repurchasing its stock. Total shares outstanding fell 10.1% in 2016, and 27.3% in the four years ending December 2016. Assurant returned $995 million to shareholders in 2016 via dividends and share repurchases. The company then repurchased another $105 million of common stock and paid out $30 million in dividends during first quarter 2017. Assurant has since repurchased $38 million of common stock in April. At this point, there is $540 million remaining in the current repurchase authorization.
The dividend yield is 2.0%. In recent years, the company has increased its dividend annually—or more often—by random amounts ranging between 6% and 66%. The most recent dividend increase was a 6% hike announced in November 2016.
Always keep in mind that when smaller companies like Assurant are financially healthy with attractive earnings growth, larger companies are going to sit up and take notice. Assurant could easily be a takeover target, considering that its larger peers in the multi-line insurance industry have market caps anywhere from $18 billion (Hartford Financial Services Group–HIG) to $57 billion (American International Group–AIG). They can afford to buy Assurant if they so desire.
AIZ is a mid-cap stock, with a market capitalization of $5.7 billion. The stock has been steadily rising and resting since its breakout to new highs from a long-term chart pattern in June 2015.
After trading in an upward-sloping range for five months, AIZ rose to 106 upon the good news of the first-quarter earnings results. The stock will likely trade between 100 and 106 for a while, then continue rising.
All stock investors should own financial stocks in 2017. AIZ is a great choice among insurance companies, offering an opportunity for both capital gains and rising dividends.
For more updates on AIZ consider taking a trial subscription to Cabot Undervalued Stocks Advisor. For more information, click here.