The truth behind BlackRock and Citigroup buying insurance firms Insurance has never been more important to Wall Street portfolios than today, or so it seems by these investment flows. Markets say rallies are due here
This story originally appeared on MarketBeat
Well, here it goes again: banks and other prominent Wall Street participants are buying insurance stocks again. By again, you can refer back to somewhat common knowledge of when financial stocks, namely insurance providers, become attractive investments in the eyes of 'smart money' such as today.
Typically, when investors feel there will be a downturn in the underlying economy, they will flood into what are termed 'defensive' names, or companies whose earnings depend on industries that are immune to downturns or ones that can even benefit from such. You know these suspects they're usually found in the healthcare sector.
Today, there is an added group to these safety stocks, and they are found in the insurance space. Names like Mercury General (NYSE: MCY), Progressive (NYSE: PGR), and even Ryan Specialty (NYSE: RYAN) have caught the attention of some of Wall Street's largest broker-dealers, but more on why later.
Suddenly there's interest
In case you missed it, the financial sector has been breaking out of its previous ceilings, even during December, which is known to disrespect market structure.
Maybe because most traders are out vacationing for the holidays, maybe because others avoid touching their portfolios before tax season, but the VIX has hit its lowest levels since 2019, signaling that good deals are more complex than ever to find right now.
Take a look at the Financial Select Sector SPDR Fund (NYSEARCA: XLF). You will notice an outperformance against the S&P 500 of up to 2.4% during the past quarter. Some could argue that this is only the beginning of a larger move from the sector, with good reason.
According to the ISM Services PMI index, the one solely responsible for delivering a real GDP growth figure in the past two quarters, the financial services sector (including insurance) has taken a turn for the better.
After pushing three consecutive months of growth, markets have placed their faith in a select few names they consider to be the winners in the group. Ryan, Progressive, and Mercury have all been reaping the rewards of higher valuations and earnings projections, but have these feelings turned into investment dollars?
When you ask giants BlackRock (NYSE: BLK) and Citigroup (NYSE: C), the answer is a definite yes. With a 5.5% increase in its Mercury stake, BlackRock (already the largest shareholder) seems to be finding some additional upside left by investing in the sector.
Citigroup saw enough reason (and value) to deploy assets and increase its Ryan Specialty position by 34.5% in December. If you have been in the markets for a long time, you know that once the big guys leave evidence behind, it is typically too late, but is it really too late for you to ride the wave?
Markets drive a hard bargain
When you spread the world of insurance stocks by all its participants, you'll find an average forward price-to-earnings ratio of 11.0x. This is the market's way of slapping a value on what they think the next twelve months of earnings should be worth today.
In the spirit of the insurance business, going for the cheapest policies will typically cost you dearly when you need them, so going with a slightly more expensive option can save you lots of headaches. These stocks work in kind of the same way in their valuations.
Going with the names that command a premium valuation means that 'they are expensive for a reason,' and if BlackRock knows the reason, do yourself a favor and don't argue with them. Mercury and Progressive go head-to-head at a 20.0x forward P/E, placing them both at a near 100.0% premium to the industry's valuation.
Ryan Specialty takes the crown at 25.9x, commanding a 136.0% premium to the industry. You may begin to wonder why on Earth would markets be okay overpaying for these companies when they can just go right next door to a cheaper competitor?
Results. The answer is results; you see, the industry is expected to grow its earnings by an average of 13.5% for next year, while these names are far beyond the norm and worth the price because of it.
Mercury analysts are shooting for a 343.8% growth in EPS, which is not really a question but rather a heads up; after all, it is good enough for BlackRock to believe in. Progressive analysts see an industry-beating 49.1% rate as well, justifying its premium value, too.
When it comes to Ryan Specialty, analysts see the lowest growth at 23.2% while placing a 15.8% upside based on price targets. However, this one is commanding the largest valuation and position increase from Citigroup, so it is likely the one that is left to catch up with the winning pack.
When there's fear, people buy insurance to protect their assets in case of an economic downturn. You now have tailwinds coming from Wall Street and the larger economy to place some exposure into the sector, so do yourself a favor and don't miss out!
