Skip to main content

Bargains ? Insurance and Utility sector

In this market turmoil, one would wonder which sector have potential to generate 50+% returns in next 12 months ? Here is my take on this.

Life, Health and Property Insurance Companies:
Companies in this sector got killed last week by virtue of their associations with finance related activities (and AIG disease). So many well-known companies like HIG, MET, Genworth, XL, Conseco got hair-cut of 50+%. Let's understand their basic business. These companies underwrite policies to cover property, health or life and collect regular premiums from their customers. If there are claims, they pay to claim-holders. Very simple business. Only gotcha is that these companies would need to park money they collect in some type of instruments - could be treasuries, bonds or other "safe" instruments. Some of these companies got into trouble because they parked their money in supposed to be highly rated securities (thanks to Moody's and S&P for rating junk as AAA !!!). Now that these mortgage based securities are found to be toxic, investors are fleeing from these companies and dumping their stocks.
As long as these companies have not underwrote CDS, they provide good opportunities.
Here is my logic on why these companies may present a great opportunity:
  • They still have AA or A ratings so can underwrite new policies
  • Are still collecting regular premiums from their policy-holders
  • Do not have to mark these assets to "mark-to-market" since they are holding them to maturity
  • Does not have fear similar to "run on the bank"
  • Have beaten down to death.
  • Here are some of the companies I would consider for investments: Conseco (CNO) at 2, Genworth (GNW) at 3.5, XL Capital (XL) at 5, Hartford (HIG) at 19 and MET at 25-28
Utility Companies:
Companies in this sector also got chopped due to their energy trading business. Check out CEG, RRI, DYN or CPN. These are independent energy producers and need cash and high rating to fund their energy trading business. These stocks got beaten down because of fear of cut in ratings and hence need to post additional collateral possibly leading to BK.
Here is my logic on why these companies provide potential of 50+% return:

  • These companies own hard assets for which replacement cost is much higher than enterprise value of these companies
  • They provide real essential service (like RRI has 1.8 million utility customers in Texas)
  • They have been careful not to repeat Enron experience
  • Warren Buffet is buying into this sector (he bought Constellation energy CEG)
  • Here are companies I would consider for investment: RRI, CPN and DYN
Caution: Please invest carefully in this volatile market and do your own analysis before investing.

Good luck!

/Shyam

Comments

Popular posts from this blog

2025 = Is it going to be 1997 or 2000?

Happy Holidays... After 5 months of hibernation with no real reason than writing block, I decided to use quiet morning of Christmas day to start writing again. Lot has happened in last 5 months - in particular release of Animal Spirits with Fed starting interest rate reduction cycle and historic victory of President Trump for 2nd term. As the year turns into 2025 and stock markets at all time high, one would wonder, what's next?  To answer this, one needs to look back at 1920s and 1990s to give us some context on where markets may be headed. 1920s saw invention of televisions, radio, wider adoption of cars, vacuums, penicillin and many other which we consider household items now. These inventions created roaring 20s with markets going up by 500% eventually leading to crash of 1929. However during mid-20s, markets keep going up due to excitement of these inventions and end of World War-1 and Spanish Flu Pandemic. 1990s also saw many inventions - the key being launch of Netscape in 1...

Elections and Rotations!

2024 will be known as an important year in terms of elections (97 nations covering half the population) across the major countries in the world. We are only halfway thru the year and already some key nations have gone thru elections and voters have indicated their preference for change (in a way). Let's take a look at few. India - Modi's BJP started with lots of enthusiasm with slogans of "Modi ki Guarantee" and "400 paar" (more than 400) seats (out of 543). Indian voters (which I considered one of the most smartest) gave reality check to Modi and BJP by reducing BJP count to 240 (from 303 in previous parliament) forcing it to form coalition government. I have lot more detailed hypothesis on these results (but not here). Almost everyone (including me) got their predictions wrong and lost some friendly bets. Indians want balance between "Strong, Prosperous, Proud" India with "Inclusive, Employment and Harmony". Modi and BJP are quick learn...

And the Oscar goes to...

It's Oscar Sunday and time for predictions for few categories - before I digress into talking about drama in DC or markets.  First of all, I want to recognize the damage LA fires have done to the beloved areas of Los Angeles and impacted families across all spectrums. My heart goes out to them and wish them recovery and rebuilding of their lives... This year's Oscar nominees and post nomination period had been interesting to say the least. Due to this, the field is wide open in almost all categories and that's what makes prediction game so interesting. Just to set expectations, I would consider a win if I get even 50% predictions correct given the dynamics of nominees this year. So here are my predictions - "And the Oscar goes to..." Best Picture - Anora (surprise could be "The Brutalist") Best Director - Sean Baker for "Anora" (Surprise could be Brady Corbet for "The Brutalist") Best Actor - Adrien Brody for "The Brutalist"...