Driven to Dominate
In this edition of the Smart Investor newsletter, we examine the stock of the second-largest U.S. auto insurer. But first, let’s dive into the latest Portfolio news and updates.
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Portfolio Updates
❖ GE Aerospace (GE) received analyst rating and price-target upgrades from a slate of leading Wall Street brokerages, including Argus Research, Bank of America Securities, Jefferies, Citi, and others, following its blockbuster earnings report and optimistic 2025 guidance.
❖ Amphenol (APH) announced the completion of its acquisition of CommScope’s Outdoor Wireless Networks (OWN) and Distributed Antenna Systems (DAS) businesses. This acquisition is expected to add $1.3 billion in revenue for 2025 and increase Amphenol’s earnings per share by $0.06, excluding acquisition-related expenses. In addition, Amphenol also acquired Lifesync Corporation, a provider of interconnect products for medical applications that generates annual sales of approximately $100 million.
❖ Interactive Brokers Group (IBKR) is continuing to impress analysts and investors with its outstanding results. Following its strong Q4 and full-year earnings results, the company has released its monthly performance metrics for January. Brokerage highlights for the month included 58% year-over-year growth in Daily Average Revenue Trades (DARTs), 39% expansion in ending client equity, and 31% increase in the number of client accounts.
❖ Visa (V) smashed analysts’ revenue and EPS forecasts for fiscal Q1 2025. Net revenue rose across all business segments, increasing by 10% year-over-year, while EPS rose by over 14%. The company also reported strong growth in payments volume, cross-border volume, and processed transactions. Visa provided an optimistic guidance for FY 2025, forecasting net revenue growth in the high single to low double digits and adjusted EPS growth in the low teens.
❖ Parker Hannifin (PH) reported mixed results for its FQ2 2025, with revenue coming in slightly below estimates and EPS surging past analyst consensus. During the quarter, the company reduced its debt by $1.1 billion, enabled by strong cash flow and divestiture proceeds. While PH achieved record operating and adjusted EBITDA margins, it faced challenges with declining sales in its industrial segment. The aerospace segment sales reached a record, contributing positively to overall performance. Looking ahead, Parker expects continued margin expansion, with aerospace growth and a gradual recovery in industrial markets anticipated.
❖ IBM (IBM) was the Portfolio’s star performer this past week, surging after its blockbuster earnings report drew a slate of analyst PT upgrades. Although its Q4 revenue came in in line with expectations, EPS was significantly above the consensus estimates. Growth was driven by AI bookings, which rose by almost $2 billion year-over-year, exceeding $5 billion.
For full-year 2024, IBM reported an impressive $12.7 billion in free cash flow for 2024, marking the highest level of cash flow generation in many years. In addition, the company revealed a 3% annual revenue growth, led by an expansion of over 10% in its Software segment, its fastest in five years. A larger share of revenue coming from the higher-margin Software sector was specifically praised by analysts, who said that it supports confidence in IBM’s AI and cloud strategy.
Although two other main segments – Consulting and Infrastructure – still saw revenue contraction, the management forecasts a return to growth in 2025. These assumptions, coupled with the expected continued GenAI tailwinds, led the management to raise its 2025 growth targets, signaling confidence in continued acceleration. This year’s total revenue growth of at least 5% is expected to be driven by IBM’s Software segment, which is projected to expand by double digits. Meanwhile, Consulting is slated to achieve low-single-digit growth, while Infrastructure is projected to contribute about a point to overall revenue growth.
❖ Microsoft (MSFT) was on the losing end of the Portfolio in the past week, hit by a double whammy of DeepSeek sell-off and negative market reaction to its earnings report. While the company’s revenue and EPS significantly surpassed estimates, investors were concerned by the slowdown in Azure’s revenue growth, which increased by 31% year-over-year, slightly below expectations.
The deceleration from the previous quarter’s 33% growth was attributed to weaker performance in non-AI cloud services. Conversely, the company’s AI initiatives exceeded expectations. Microsoft reported that its overall AI business achieved an annual revenue run rate of $13 billion, representing a 175% YoY increase, while Azure AI services experienced a 157% growth during the same period. Microsoft’s AI monetization expanded to Copilot offerings, now accounting for over $2 billion in ARR.
Analysts remain optimistic, noting that the increasing contribution of AI to Azure’s revenue is a strong positive. They believe that Microsoft’s conservative revenue guidance is due to forex headwinds, go-to-market challenges, and capacity constraints. Analysts are confident that Microsoft’s medium- to long-term revenue opportunities exceed market expectations, as AI is expected to fuel accelerating growth.
❖ PayPal Holdings (PYPL) saw its stock plunge on Tuesday following the release of its quarterly and annual results. While PayPal exceeded quarterly estimates for both earnings and revenue, with a 4% year-over-year revenue increase and a smaller-than-expected decline in adjusted EPS, investor reaction was negative. Key operating metrics – total payment volume (TPV) and transaction margin dollars – rose 7% YoY. The company also issued Q1 and full-year 2025 EPS guidance above analyst consensus estimates.
For full year 2024, net revenues grew 7% to $1.68 trillion in total payment volume. Active accounts increased by 8.8 million, reaching 434 million. PayPal generated $6.8 billion in free cash flow and returned $6 billion to shareholders through share repurchases. Additionally, the company authorized a new $15 billion stock buyback program, equivalent to over 20% of its market cap, highlighting strong cash generation and management’s confidence in long-term prospects.
Despite the beat-and-raise report, investors zeroed in on weaker aspects of the release, particularly after PYPL’s strong performance over the past three months. One notable concern was Branded Checkout volume growth, which rose 6% YoY, missing 7-8% expectations. Given that Branded Checkout is PayPal’s highest-margin service, the shortfall raised concerns over market share retention. Additionally, operating margin contraction, following four consecutive quarters of improvement, signaled rising costs related to customer acquisition and retention.
Overall, the payments giant revealed a “work in progress” report, as it continues its transformation that began a year ago. While its strategic shift toward branded checkout, peer-to-peer payments, and Venmo monetization reinforces its focus on core strengths, competition is intensifying, making cost efficiency and market-share protection ongoing challenges. Some analysts view the sell-off as an overreaction amid market jitters over the past weeks, arguing that PayPal’s path to profitability enhancement is still in its early stages, requiring patience from investors. BTIG analysts added that they view the sell-off as due to high expectations rather than a structural issue within the company’s report.
❖ KKR & Co (KKR) also saw a large post-earnings drop despite easily surpassing analyst projections of its Q4 overall revenue and EPS and delivering strong year-over-year growth across many key metrics, including fee-related earnings, total operating earnings, and adjusted net income. The alternative asset manager’s AUM rose by 15% year-over-year, but growth was lower than analysts projected, leading to investor concern. In addition, nearly all reported metrics were weaker than in Q3, mirroring the trend seen in other asset management firms that have already reported their results. Analysts have provided mixed reactions to KKR’s report, with some expressing concerns over rising expenses. Overall, the company provided robust quarterly results, with an announced dividend increase reflecting confidence in its future performance.
❖ Pentair (PNR) reported Q4 2024 revenue and earnings above analyst consensus estimates. However, market reaction to earnings was negative as the company’s 2025 adjusted EPS guidance of $4.65-4.80 came in below analyst projections of $4.83. Additionally, the anticipated flat to 2% sales growth for 2025 contributed to investor concerns, leading to the decline in PNR’s stock price.
❖ Alphabet (GOOGL) Q4 2024 earnings report revealed mixed results, leading to a drop in after-hours trading. The company reported earnings per share of $2.15, above analyst expectations, but revenue of $96.5 billion fell short of the anticipated $96.7 billion. Notably, Google Cloud’s revenue increased by 30% to $12 billion, missing analysts’ estimates of $12.2 billion.
Additionally, Alphabet announced 2025 capex plans of $75 billion, far exceeding the ~$60 billion that Wall Street had expected. Although the higher-than-expected capex guidance spooked investors, GOOGL’s planned investment is in line with the amounts penciled in by its fellow hyperscalers Microsoft and Meta. Still, amid elevated market anxiety, concerns persist that rising infrastructure costs may slow profit growth,
Despite the negative market reaction, several analysts positively opined on GOOGL’s report. BofA analysts said they are “encouraged to see another quarter of strong Search growth,” with the core business continuing to perform well. They added that the market might be underestimating how AI-driven search enhancements could boost revenue in 2025. Although investor concern over growing competition is understandable, the upcoming catalysts – including new AI-driven search products and cloud solutions – have the potential to drive investor sentiment.
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Portfolio Stocks Under Review
❖ Our recent Portfolio addition, Micron (MU), has been hard hit by the DeepSeek rout and suffered additional sell-off after President Trump threatened to slap tariffs on several U.S. trading partners. Although Micron fell along with other hardware and infrastructure stocks, its losses were more pronounced, as the stock appears to be experiencing negative market momentum. While its long-term investment case remains intact, we intend to follow the stock to see whether it is able to shake off the short-term investor negativity.
❖ Dell Technologies (DELL) remains under review due to negative investor sentiment weighing on the stock in the past month, which was further exacerbated by the stock rout caused by the DeepSeek developments and Trump’s tariff threats. While we believe in the company’s outstanding long-term potential, this “sticky” negativity may force us to sell the stock unless we see a sentiment rebound.
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Portfolio Earnings and Dividend Calendar
❖ The next several days will be busy with Smart Portfolio companies’ earnings reports. Uber Technologies (UBER) is expected to reveal its results today before hours, while MetLife (MET) is scheduled to report after hours. ITT (ITT), Amazon (AMZN), and Reinsurance Group (RGA) are expected to release their quarterly results tomorrow. In addition, Cisco Systems (CSCO) is scheduled to report on February 12th.
❖ The ex-dividend date for Parker Hannifin (PH) and Howmet Aerospace (HWM) are February 7th, while for IBM (IBM) it is February 10th, for Visa (V) and ASML Holding (ASML) it is February 11th.
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New Buy: Progressive (PGR)
The Progressive Corporation is one of the largest auto insurance providers in the United States, specializing in personal and commercial vehicle coverage. The company, known for its direct-to-consumer model, usage-based insurance programs, and innovative pricing technology, also offers home, renters, and specialty property insurance through subsidiaries and partners. With a strong presence across the U.S. and expanding digital capabilities, Progressive continues to be a leader in the property and casualty insurance market.
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Organic Progress
Progressive Corporation was founded in 1937 in Mayfield, Ohio, and conducted an IPO in 1971. In 1987, the sum of the company’s written premiums was over surpassed $1 billion, and by 2023 that number reached over $51 billion.
Over the past several years, PGR’s success has been driven primarily by organic growth. The company’s technological innovations, direct-to-consumer model, and expansion into commercial and home insurance have fueled steady revenue and market share gains.
Progressive’s auto insurance market share has expanded significantly, rising from below 10% in 2013 to over 14% by 2023, making it the second-largest U.S. auto insurer. This growth has come without major acquisitions, relying instead on competitive pricing, digital sales, and data-driven underwriting. The company’s Snapshot® telematics program has played a key role in risk-based pricing, attracting customers looking for personalized insurance rates.
While limited M&A activity has supplemented Progressive’s expansion, acquisitions have been targeted and strategic. The acquisition of American Strategic Insurance (ASI), completed in 2020, enabled Progressive to enter the homeowners insurance market and bundle policies, improving customer retention. In 2021, the company acquired Protective Insurance Corporation, strengthening its presence in commercial auto and fleet insurance. However, the company’s commercial lines expansion—now making it one of the largest commercial auto insurers in the U.S.—has been primarily organic, leveraging its expertise in underwriting for small businesses and rideshare services.
Despite an increasingly competitive landscape, Progressive’s focus on pricing accuracy, direct distribution, and technological advancements has allowed it to sustain profitable growth and expand its market position. Its strong underwriting performance and disciplined cost structure have further solidified its status as a leader in the property and casualty insurance sector. Today, with a market cap of $144.3 billion and annual revenues of $71.6 billion (TTM), PGR ranks #62 on the Fortune 500 list.
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Data-Driven Growth
Progressive operates a direct and agency-based insurance model, generating revenue through premiums, investment income, and policy fees. Its competitive edge lies in technology-driven pricing, strong underwriting discipline, and strategic bundling.
Nearly 80% of total revenue comes from Personal Lines, covering auto and specialty vehicles. While this segment dominates premium income, Commercial Lines (16.1%) and Property Insurance (4.4%) provide diversification and additional growth opportunities.
PGR’s data-driven underwriting and telematics programs allow for more precise risk assessment than traditional models. By leveraging real-time driving data and behavioral analytics, policies are priced based on actual driving habits rather than broad demographics.
A key part of this strategy is Snapshot®, Progressive’s usage-based insurance (UBI) program, which tracks driving behavior to adjust premiums. This attracts safer drivers, improves loss ratios, and strengthens profitability. Additionally, AI-powered claims processing enhances fraud detection, automates approvals, and optimizes repair cost estimates, cutting costs and speeding up settlement times.
Unlike traditional insurers that rely heavily on agents, Progressive has expanded direct-to-consumer (DTC) sales, increasing cost efficiency and customer retention. While two-thirds of Personal Lines premiums come from DTC channels, independent agents still generate about 33% of revenue, allowing the company to capture agent-led customers, bundle policies with third-party insurers, and sell non-Progressive policies via the Progressive Advantage Agency.
Progressive has been a major force in insurance bundling, particularly in auto and homeowners packages. The 2015 ASI acquisition strengthened its bundling capabilities, improving customer retention. Additionally, as one of the largest U.S. commercial auto insurers, Progressive is scaling beyond personal auto, capitalizing on the gig economy, small businesses, and rideshare growth.
By combining advanced risk assessment, digital distribution, and diversified offerings, Progressive has built a resilient, scalable model, driving consistent market share and earnings growth.
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Profits in Motion
Progressive showcases strong financial health, supported by a solid balance sheet, with net debt-to-equity below 25% and steady investment income from its substantial portfolio of high-quality securities. The company’s debt is well-covered by operating cash flow, and interest payments are comfortably covered by EBIT multiple times over.
The company’s low financial risk is reinforced by its high credit ratings: “A+” at Fitch, “A” at S&P, and “A2” at Moody’s. Fitch specifically highlighted Progressive’s strong market position, citing its “consistently strong operating performance, very strong risk-based capital position, market-leading risk management, and underwriting expertise.” The agency also recognized Progressive as “one of the most consistently profitable underwriters among leading property and casualty (P/C) insurers.”
PGR stands out in the insurance industry for its capital efficiency, with ROA ranking in the top 10% and ROE in the top 5%. The company consistently generates strong free cash flows, and its margins remain competitive within the sector.
Unlike insurers in lower-margin business lines, where investment income is the primary earnings driver, Progressive’s profitability stems largely from underwriting performance. Over the past three years, net premiums written have grown at a CAGR of ~14%, reflecting Progressive’s ability to expand profitably without relying heavily on investment returns.
In 2024, net premiums written rose by 21% year-over-year, contributing to similar revenue growth. Meanwhile, net income and EPS surged by 117% from 2023, driven by improved operating leverage, higher investment income, and, most notably, a drastic improvement in underwriting profitability, as evidenced by a significantly lower combined ratio.
Progressive’s combined ratio has averaged ~93% over the past three years. In Q4 2024, the ratio improved to 87.9%, down from 88.7% in the previous year, reflecting enhanced underwriting efficiency. Net investment income, while secondary to underwriting profits, grew 42% YoY in 2024, benefiting from higher yields on fixed-income securities due to favorable rate conditions at the time of investment.
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Full-Throttle Returns
Progressive’s strong profitability and FCF generation have allowed the company to invest in growth, return capital to shareholders through dividends and buybacks, and maintain financial stability to navigate market fluctuations.
In 2018, Progressive began paying regular quarterly dividends, supplemented by an annual variable dividend each fourth quarter. While its current dividend yield of 1.99% is modest compared to some high-yielding Financial sector stocks, it exceeds the sector average. The dividend has grown by nearly 85% in the past five years, supported by strong earnings growth and a conservative payout ratio, with analysts projecting a similar rate of growth during the upcoming years.
Beyond dividends, Progressive strategically repurchases shares based on its capital position and future needs. In May 2022, the Board authorized the repurchase of up to 25 million shares, with no expiration date. Since then, the company has repurchased shares worth approximately $274.5 million, including $133.8 million in the first nine months of 2024.
Progressive’s stock, a component of the S&P 500, hit an all-time high in November before pulling back 11% by mid-January, amid profit-taking and broader market volatility. However, strong fundamentals and analyst support spurred renewed dip-buying interest, with shares rebounding in the past three weeks. Several major brokerages—including Wells Fargo, BMO Capital, Evercore ISI, and J.P. Morgan—have raised their price targets. in the past month alone. Consensus now implies nearly 15% upside, even after a 40% rally over the past 12 months.
Despite this outperformance, PGR remains attractively valued. While it trades at a premium to the broader Financial sector and industry peers, this reflects its superior revenue and EPS growth, higher total shareholder returns, and capital efficiency. Additionally, based on discounted cash flow models, Progressive appears undervalued by ~45%, presenting a compelling mix of value, growth, and shareholder returns.
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Investing Takeaway
Progressive Corporation is a leading U.S. auto insurer with a technology-driven business model and a strong underwriting focus. Its direct-to-consumer strategy, telematics adoption, and disciplined risk management have fueled steady market share gains and profitability. While its primary earnings driver is underwriting, investment income and capital efficiency support long-term stability. Progressive’s dividend growth and strategic share buybacks reflect a balanced approach to capital allocation. With a resilient financial position, consistent free cash flow generation, and a history of strong execution, Progressive remains well-positioned for sustained earnings growth and shareholder value creation, offering attractive long-term investment potential.
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New Buy: Pentair (PNR)
Pentair Plc provides water solutions for residential, commercial, industrial, infrastructure, and agriculture applications. PNR is a global leader in the water treatment industry, providing advanced and sustainable water solutions to customers in over 150 countries around the world.
PNR reported its fourth-quarter and full-year 2024 earnings on Tuesday, and while the numbers were better than expected, the results raise serious concerns about the company’s future growth trajectory. Revenue for Q4 declined 1.2% year-over-year, highlighting ongoing weakness in demand. While adjusted EPS rose from the same period last year, the real issue lies in the diminished forward outlook.
Pentair’s 2025 guidance projects flat to just 2% sales growth, a marked slowdown compared to past years. This signals stagnation at a time when investors expect industrial and water solutions companies to capitalize on secular tailwinds.
Another red flag is Pentair’s margin contraction. Despite pricing actions and cost efficiencies, operating margins declined, indicating higher input costs and an inability to fully pass those costs on to customers. A lack of pricing power in an inflationary environment suggests further pressure on profitability moving forward.
Management’s guidance for 2025 EPS of $4.65-4.80 fell short of Wall Street expectations of $4.83, raising doubts about whether Pentair can drive meaningful earnings expansion. The company’s core residential and commercial water filtration markets face slowing growth, and without a clear catalyst for reacceleration, it’s difficult to justify holding the stock at current levels.
With limited upside potential, weak revenue trends, and margin headwinds, the risk-reward profile for PNR is increasingly unfavorable. Although we may revisit Pentair in the future, given the current disappointing outlook, we believe it is time to lock in the gains and sell the stock.
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
The Winners’ ranks have shrunk this past week as we sold PNR, while the strong drop in PYPL led it down below the 30% threshold. Now, our exclusive club now includes 15 stocks: GE, AVGO, ANET, TPL, TSM, EME, ORCL, HWM, IBKR, PH, APH, ITT, CRM, KKR, and AMZN.
The first contender is now IBM with a gain of 25.78% since its purchase on November 20th. Will it close the gap, or will another stock outrun it to the finish line?
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Disclaimer
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