The Comfort of Reliability
The commercial insurance industry presents a compelling investment case for those seeking to diversify their portfolios with robust and resilient assets. This sector stands out for its capacity to navigate through market volatilities and economic shifts.
When considering investments in this space, it’s essential to look for companies that demonstrate key strengths, including a proven track record of weathering previous downturns, a diversified global presence, operational profitability, as well as a strong balance sheets characterized by low levels of debt and high credit ratings.
The commercial insurance industry’s potential for steady growth, driven by increasing global business activities and the ever-growing need for risk mitigation, makes it an attractive area for investment. The industry’s blend of stability, adaptability, and consistent demand underscores its appeal to investors looking for long-term value creation.
We will present one of the leading companies in this industry, but first, let’s delve into a short update on the economy and markets, and the Smart Investor calendar.
Weekly Portfolio Insights
Several important reports, whose readings affect stock markets directly, are scheduled to be published in the next few days.
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On Thursday, the Institute for Supply Management will publish January’s ISM Manufacturing PMI report, which shows business conditions in the U.S. manufacturing sector. It is a significant indicator of the overall economic conditions. PMIs are considered one of the most reliable leading indicators for assessing the state of the U.S. economy, helping analysts and economists anticipate changing economic trends.
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On Friday, the University of Michigan will release the readings on January’s Michigan Consumer Sentiment Index and UoM 5-year Consumer Inflation Expectations. These reports portray the results of a monthly survey of consumer confidence levels and consumer views of long-term inflation in the United States. The level of confidence affects consumer spending, which contributes about 70% of the U.S. GDP. The inflation expectations index is one component that goes into the Fed’s calculations of the Index of Inflation Expectations.
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Also on Friday, the U.S. Bureau of Labor Statistics will report on January’s Nonfarm Payrolls and Unemployment Rate. These reports are considered two of the most important economic indicators, as policymakers follow the shift in the number of positions since it is strongly associated with the health of the economy as a whole. One of the mandates of the Federal Reserve is to promote full employment, and it takes labor market changes into account when determining its policy decisions.
As for the stock calendar, the Q4 2023 earnings season for Smart Investor Portfolio companies is in full swing, with the quarterly results of Parker Hannifin (PH), Deutsche Bank AG (DB), Cigna (CI), Vertex Pharmaceuticals (VRTX), ON Semiconductor (ON), Check Point (CHKP), Centene (CNC), CDW (CDW), Molina Healthcare (MOH), McKesson (MCK), EnerSys (ENS), and FLEETCOR Technologies (FLT) scheduled to be published in the next few days.
The ex-dividend date for Lamb Weston Holdings (LW) is February 1st.
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Weekly Portfolio Trades
Today, we are performing two changes to the Smart Investor Portfolio: we are adding of one of the nation’s largest commercial insurance providers, W. R. Berkley, and deleting STMicroelectronics. Please find the rationale for these changes below.
We are also introducing a new section, “Under Review,” where we will flag stocks that may be let go from the portfolio for a variety of reasons, which will be laid out in this section.
New Buy: W. R. Berkley Corporation (WRB)
W. R. Berkley Corporation is an insurance holding company that is among the largest commercial line writers in the United States. W.R. Berkley operates worldwide in two segments of the property casualty insurance business: Insurance and Reinsurance.
WRB was founded in 1967, and since then has become a Fortune 500 company with a market capitalization of almost $21 billion and annual revenues of over $12 billion. Throughout the years, the company has grown through acquisitions and the formation of new companies.
Today, its scope spans over 50 subsidiaries, working as operating units within the parent WRB, with each of the subsidiaries acting independently in their specific markets. The decentralized business model allows WRB subsidiaries to customize their services to specific business or geographical niches, delivering fast responses to market and economic changes while benefiting from the resources and financial strength of the parent company.
Berkley insurance businesses deliver specialized expertise through more than 190 office locations in the United States, Canada, Europe, the U.K., South America, and Asia Pacific. WRB offers a wide range of products and services, with the main offers being property and casualty insurance products to businesses. The company serves commercial firms of all sizes, as well as state and local governmental bodies.
R. Berkley has been publicly traded on the New York Stock Exchange (NYSE) under the ticker “WRB” since 1984; it joined the S&P 500 Index in 2019.
WRB’s financial health is stellar: it has very little debt (8% net debt-to-equity ratio), with the debt well-covered by operating cash flow and the interest payments covered by EBIT many times over. The company’s debt is highly rated by the global credit rating agencies: “BBB+” by S&P Global Ratings, “Baa1” by Moody’s, and “A” by Fitch.
According to Fitch Ratings, “Berkley has a favorable business profile relative to industry peers, owing to the company’s competitive positioning across varied business lines and geographies. Berkley has a broad commercial insurance product portfolio that provides diversified sources of revenue and the flexibility to emphasize various products when market conditions are favorable, thus reducing the company’s dependence on any single product line.” In addition, Fitch applauded WRB’s low and decreasing financial leverage, strong capitalization, healthy liquidity, robust operating cash flow generation, and strong performance, underscoring its “minimal volatility in key financial performance metrics relative to peers over an extended period.”
W. R. Berkley’s capital efficiency metrics – Return on Equity, Return on Assets, and Return on Invested Capital – are in the top 20% for the Insurance industry. WRB also stands out due to its very strong profitability metrics, with its gross (44.7%), EBITDA (18%), operating (17.6%), FCF (35%), and net (12.3%) profit margins ranking in the top tier of its industry.
In the past three years, WRB’s revenues have increased at a CAGR of 14.5%, while its earnings-per-share (EPS) surged by 39.3%. On January 24, 2024, the company shared its Q4 2023 and full-year 2023 financial results, featuring record quarterly and annual pre-tax underwriting income and net investment Income. During the quarter, WRB strongly exceeded analysts’ estimates for revenue and earnings. In fact, the company has surpassed EPS estimates in 11 out of 12 recent quarters. In 2023, Berkley reported strong growth in gross and net premiums written, which rose to record heights.
The management said that after a record-setting year, 2024 is expected to be “rewarding for shareholders,” and conveyed confidence that the company “will continue to deliver superior long-term risk-adjusted returns and increase value to shareholders in 2024 and beyond.”
In 2023, Berkley has benefited from the high interest-rate environment, which has boosted its investment income. While there is a risk that the potential pivot by Federal Reserve to easier monetary policy this year might depress investment income, the company’s track record of consistent underwriting profitability mitigates this threat to its bottom line. This starkly contrasts with many other non-life insurers whose profitability depends on premium investing outcomes because of low or negative underwriting profits.
During the course of 2023, WRB returned a total of $1 billion to its shareholders, including special and regular dividends, as well as share repurchases for the amount of $537 million. The company has been paying dividends since 1989; while the current yield of 0.6% is low by industry standards, WRB’s strong profitability and its alignment with shareholder interests permit an outlook supporting payout increases in the years ahead. In addition, the company performs buybacks on an opportunistic basis. In November 2023 the repurchase capacity was increased to 20 million shares of common stock, representing about 11% of shares outstanding. Berkley’s current buyback yield of 2.8% (similar to the S&P 500’s average) is expected to increase further thanks to the authorization expansion.
WRB’s stock has had a good run during recent months, spurred by its strong financial results, but its longer-term performance has also been very robust. Thus, the stock rose by 16.5% in the past 12 months and by 96% in the past three years, strongly outperforming its industry as represented by iShares U.S. Insurance ETF (IAK).
Despite its strong performance, Berkley’s stock remains attractively valued. Although its valuations are higher than the averages for the Financial sector, WRB comes in at the middle of the valuation range for its peer insurers. In addition, the stock is trading ~45% lower than its fair value, based on projected cash flows, which significantly raises its value proposition.
TipRanks-scored top Wall Street analysts see an average upside of 4% for the stock over the next 12 months; however, given its track record, it may well surprise on the upside. WRB carries a TipRanks Smart Score rating of 9/10 (“Outperform”) with a “Moderate Buy” recommendation:
To sum it all up, W. R. Berkley Corporation features a robust business model with diversified revenue sources, while its effective management, strong underwriting practices, and agility in response to market dynamics are reflected in its impressive financial performance and optimistic outlook. WRB’s superb financials, strong shareholder alignment, and attractive valuation make it a compelling combination of stability, quality, and value. As such, we believe it can be a valuable addition to the Smart Investor portfolio.
New Sell: STMicroelectronics N.V. (STM)
STMicroelectronics N.V. designs, develops, manufactures, and sells semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific. STM is an Integrated Device Manufacturer (IDM), meaning that it takes charge of all processes in producing semiconductors, covering fabless, foundry, and back-end processes. It serves automotive, industrial, personal electronics and communications equipment, and the computers and peripherals markets.
The company features stellar financial health and robust profitability. While in Q4 the company reported slower revenue growth and lower EPS than in the same period of the previous year, this was widely expected due to a cyclical decline in demand for semiconductors caused by overstocking after the pandemic.
However, while the overall chip industry is on the mend and the outlook has brightened, the auto chip niche, responsible for almost half of STM’s revenues, remains problematic in its short-term outlook. Longer term, the global transition to EVs and autonomous vehicles will significantly increase demand for semiconductors. However, 2024 projections from different companies in the industry reflect sales growth that will be slower than previously anticipated.
In addition, demand from some of STM’s largest customers, such as Apple (AAPL), Tesla (TSLA), Mobileye (MBLY), and others, is not expected to pick up in the next few quarters, for multiple reasons. In particular, Apple expects much slower sales in China due to the country’s economic weakening and implications of trade war. This weakness will be passed on to STM since Apple is the company’s critical client, responsible for over 15% of sales. Besides, STM’s heavy exposure to the personal electronics market (about 30% of its total revenue) is expected to bring down profits in the next few quarters due to flagging Chinese demand.
Given these factors, and the fact that the company has issued a very benign guidance for Q1 earnings, several analysts have lowered their price targets for the stock, as well as earnings and revenue growth projections. While STM remains a very solid and profitable company, its stock may undergo a difficult period this year. We may reassess the stock in a bit, but for now, we believe it is appropriate to sell the stock.
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Under Review: General Dynamics (GD)
The aerospace and defense company has been placed under review for potential sale with low urgency. The company delivered mixed results in Q4 2023, outperforming analysts’ revenue projections, but it missed on EPS. Still, both the top and bottom lines reached their records, which led to a strong run-up in the stock. This has pushed GD from “undervalued” to “overvalued” territory, increasing its vulnerability to a pullback on any negative news. General Dynamics is a stable, well-capitalized business; it is also a Dividend Aristocrat, which generously compensates its shareholders for the lack of significant earnings growth. As such, high valuations present a problem for the stock, leaving the slow-growth defense giant with little margin of safety.
Charter Members of the 30% Winners Club
*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Our exclusive club’s ranks have expanded to eight stocks, as General Dynamics (GD) and Wesco International (WCC) accented over the 30% threshold.
The eight champions now include GE, SMCI, AVGO, ANET, CDW, ORCL, WCC, GD, and WCC.
The next in line to enter the Winners’ ranks are Ulta Beauty (ULTA) and Vertex Pharmaceuticals (VRTX), which rose 27.9% and 27.5%, respectively, since their purchase dates. Will one of them be able to close the gap, or will someone else outrun them to the finish line?
What’s Next?
Our next commentary will come out on Wednesday, February 7th, before the market opens.
Until then – we wish you a world of investment success!
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
