A contrarian take on hurricanesMARK HULBERT
A contrarian take on hurricanes
By Mark Hulbert, MarketWatchAlso from this column
Last Update: 11:09 PM ET Jun 6, 2006
ANNANDALE, Va. (MarketWatch) -- I've heard of buying when the blood is running in the streets. But how about investing in property casualty insurers at the start of what is shaping up to be a terrible hurricane season?
That would certainly take guts. The National Oceanic and Atmospheric Administration is predicting a "very active" hurricane season this year.
During a news conference in late May, in fact, NOAA Administrator Conrad Lautenbacher said, "For the 2006 north Atlantic hurricane season, NOAA is predicting 13 to 16 named storms, with eight to 10 becoming hurricanes, of which four to six could become 'major' hurricanes of Category 3 strength or higher."
This forecast comes in significantly above the average, which is for 11 named storms, with six becoming hurricanes, and two becoming "major" hurricanes.
Coming immediately after the 2005 season, which saw unprecedented property damage caused by Hurricanes, Katrina, Rita and Wilma, you'd expect the conversation among advisers to be focused on which property casualty insurers are in danger of drowning rather than which represent good investment opportunities.
And that is precisely why contrarian-oriented investors are interested in such insurance companies. When an entire industry is out of favor, the good companies suffer along with the bad ones. The stocks of the good ones therefore get beaten down to levels that represent attractive long-term investment opportunities.
A great illustration of this contrarian analysis comes from Standard & Poor's. In the issue of their newsletter The Outlook dated June 7, S&P sifts through the scary forecasts from NOAA and various insurers' fundamentals and finds several property casualty insurers that represent "attractive investment opportunities."
S&P's general advice is to favor property casualty firms that have, "diversified revenue and earnings streams, both by product line and geography, and those that are somewhat insulated from the competitive, cyclical nature of property-casualty insurance premium pricing trends."
One of the best examples of a company that satisfies these criteria, according to S&P, is Allstate (ALL) . S&P notes that, even assuming the low end of the company's earnings projections for this year, its ratio of current price to projected 2006 earnings stands at just 9. S&P believes that the company is not only undervalued generally, but undervalued relative to other property casualty companies as well.
Another S&P favorite in this sector is Chubb (CB). "In our view," S&P writes, "Chubb has carved out a number of profitable niches, such as high-end personal lines coverage and specialty commercial lines offerings, which have insulated the company to some degree from the competitive pricing environment."
Consistent with the property casualty industry being out of favor, neither of these two companies is very popular right now among investment newsletters generally. Besides being recommended by S&P's newsletter The Outlook, each of these two companies is recommended by just two other newsletters: Allstate by The Prudent Speculator and the Buyback Letter, and Chubb by the 2-for-1 Stock Split Newsletter and the Value Line Investment Survey.
Note carefully, however, that though there may be only a handful of other newsletters recommending Allstate and Chubb, those services that have joined with S&P in recommending these stocks are among the select few to have beaten the overall stock market over the years they have been tracked by the Hulbert Financial Digest.
One gutsy way of playing S&P's advice would be to invest in these property casualty insurers on the day after a major hurricane hits the U.S. The resultant media attention will no doubt depress all stocks in this industry, including these two.
Investing in such companies in the wake of a hurricane is not for the faint of heart, of course. But if S&P and the other newsletters recommending Allstate and Chubb are right, you will be amply rewarded for investing in them when they are out of favor.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.