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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Special Bulletin

A leading provider of financial advice joins the Special Situation Stock Portfolio as a Strong Buy.

Today’s news: AXA Equitable Holdings (EQH) joins the Special Situation Stock Portfolio as a Strong Buy.

I review hundreds of stocks near year end for a variety of reasons:

  • Most companies function on a December fiscal year. Investors are turning their eyes toward expected 2020 financial performance, and no longer care very much about 2019 numbers.
  • As the new year approaches, analysts firm up their 2020 earnings projections, giving me a more accurate sense of what to expect in the coming months.
  • There are certain trading patterns that culminate in December, then potentially change direction in January.

Last night, as I was going through this stock review process, I stumbled upon AXA Equitable Holdings (EQH), a leading provider of financial advice, asset management and protection solutions to Americans. The first thing I noticed was that the substantial earnings per share (EPS) numbers were paired with a low share price, leading to a price/earnings ratio (P/E) of just under 5. My immediate thought was, “I’m either looking at an extreme bargain, or there’s something very wrong with this company.”

I quickly glanced at the price chart, and BOOM!, it revealed a stock that began breaking out of a trading range a few days ago. Now I knew that there was something happening with EQH that combined extreme undervaluation with a bullish price chart, so I ignored my plans for the evening and decided that opportunity might be knocking.

A bit more research revealed that the French insurer AXA S.A. had held a 39.1% stake in AXA Equitable Holdings until just recently. They sold 144 million shares of their EQH stock this week in a secondary stock offering, in order to raise cash to fund last year’s $15 billion purchase of XL Group (XL). (Some of you will recall that XL Group was featured in our Growth Portfolio when it received the buyout offer from AXA in March 2018.) AXA S.A.’s ownership in AXA Equitable Holdings is now down to about 10%.

AXA Equitable Holdings repurchased 24 million shares of their stock within the context of the aforementioned secondary offering. Just last week, they had increased their share repurchase authorization by $400 million, then proceeded to spend almost all of the outstanding repurchase authorization on this week’s repurchase. My research showed me that share repurchases and dividend payouts are a priority for AXA Equitable Holdings. Therefore, it would not be unusual for investors to hear of a new repurchase authorization in the next few months.

AXA Equitable Holdings has two principal franchises: AXA Equitable Life Ins. Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), an investment management firm. (I coincidentally knew that AllianceBernstein is an attractive stock, having reviewed their numbers in recent days.)

Last week, AXA Equitable Holdings reported third-quarter non-GAAP EPS of $1.38 when the market expected $1.06. The company achieved year-over-year increases in premiums and net inflows in all business divisions, which include Individual Retirement, Group Retirement, Investment Management & Research and Protection Solutions. The market was very pleased with the quarter and the company’s future prospects.

AXA Equitable Holdings issued their initial public offering (IPO) in May 2018. The stock churned in place, then collapsed in the fourth quarter of 2018 when the broader stock market plummeted. EQH rebounded in early 2019, then spent many months in a consistent trading range. Finally, the stock broke free last week, rising on heavy volume. Three investment firms raised their price targets on EQH last week to a range of 27-31, implying a potential 14%-32% capital gain from yesterday’s closing price.

EQH does not fit the requirements of our Growth Portfolio, because 2020 EPS growth is expected to be just 5.5%, so I’m adding it to the Special Situation Stock Portfolio as a Strong Buy, to catch the current run-up. This mid-cap stock is great for traders. Additionally, dividend investors might be attracted to the 2.5% yield, which most recently increased in May 2019. Strong Buy.