Financials 829

These financial shares will give you exposure to two major sub-sectors that are undervalued.

BlackRock, Inc. (BLK) | Daily Alert April 16

BlackRock is the largest asset management firm in the world with $7.43 trillion of AUM at the end of 2019. BLK offers a range of investment products and asset classes, both active and passive, to institutional and individual investors.

In addition, the company was just selected by the Federal Reserve to handle several of its massive bond buying programs to help stabilize the fixed income markets, as was also the case back in the 2008 Global Financial Crisis.

We like that BLK is well-diversified amongst product mix which keeps it somewhat agnostic to shifts between asset classes and investment strategies, helping to limit the impact that market swings or withdrawals can have on its AUM. Additionally, a heavier concentration of institutional clients has historically given BLK a more stable group of assets than many of its peers.

BlackRock’s iShares ETF platform is an industry leader and maintains sizable market share. BLK also offers alternative asset investments, which could enhance inflows as new strategies and funds gain traction. Broad opportunities for organic growth for BLK’s numerous offerings lay in the retail space, in U.S. retirement, and in the international distribution of iShares, as well as its up-and-coming risk management platform, known as Aladdin.

John Buckingham, The Prudent, 877-817-4394, April 2020


The Progressive Corporation (PGR) | Daily Alert April 20

Progressive is an oddity among stocks this year—its shares have gone up. The stock has returned 11% including dividends in 2020, compared to average losses of 26% for S&P 1500 Index insurance stocks and 34% for all members of the financials sector. Among the index’s 26 property and casualty insurers, Progressive is one of only three stocks up this year.

Progressive controls a roughly 11% slice of the U.S. auto-insurance market, trailing only State Farm and GEICO. With an Overall rank of 97, Progressive scores in the top 30% of our research universe for five of seven Quadrix® categories. Progressive, already a Buy and a Long-Term Buy, is being added to the Focus List.

Progressive doesn’t insure companies for workers compensation or interruption, two areas likely to hammer other P&C insurers due to the coronavirus pandemic. Rather, Progressive’s businesses appear shielded from the coronavirus-driven downturn, at least for now.  Personal auto insurance accounted for 78% of Progressive’s underwriting business last year. Commercial lines—covering business vehicles, taxis, trailers, dump trucks, and tow trucks—generated 12% of underwriting revenue. Personal insurance for motorcycles, recreational vehicles, watercraft, and snowmobiles represented 5%. Finally, property-insurance was 4%.

With many Americans staying home, the number of automobile accidents should decline, potentially fattening Progressive’s profit margins. In noting that driving mileage has plunged 35% to 50% in most states, Allstate ($97; ALL) said it will return to auto-insurance customers 15% of their monthly premiums for April, totaling more than $600 million.

Two smaller, regional insurers have announced similar moves. Progressive said it might also return some premiums to customers. However, Progressive has been far less aggressive than most insurers in pushing through higher auto rates over the past year, so refunds may be minimal.

Progressive does face the risk of policy cancellations, especially for its commercial-lines business. A wave of defaults on car loans could also hurt Progressive if it leads to a surge in policy cancellations. However, financially strapped consumers have historically stopped paying other bills long before they lapsed on car payments. Additionally, many individuals will still need vehicles for transportation—they may simply go with cheaper cars.

Reflecting its attractive business profile and relatively strong share price action, Progressive has a trailing P/E ratio of 14, above its industry’s median of 13. In the first two months of 2020,
Progressive’s operating earnings per share slipped 3%, though total revenue rose 2%. For the full March quarter, the consensus expects Progressive to report earnings per share of $1.45, up 7%, on revenue of $10.23 billion, up 11%. Nancy’s note: PGR missed EPS estimates, posting earnings of $1.17 per share (looks like, due to losses on securities held), on revenues $9.9 billion, which were up 7%.

Richard Moroney, CFA, Dow Theory, 800-233-5922, April 13, 2020


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