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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

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