At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Here, we'll show you whether those bigwigs actually know what they're talking about. With help from Motley Fool CAPS, we track the long-term performance of Wall Street's best and worst.
And speaking of the best ...
What do you do when one of the best investors in the business takes a look at one of the most boring sectors of industry, and actually gets excited? Personally, I'm a fan of boring stocks, so when Barclays Capital announced Monday that it sees huge value in the life insurance industry, I paid attention.
According to StreetInsider.com, Barclays dove into the muddy insurance waters headfirst, initiating coverage of eight separate big-name insurers. After crunching the numbers, the banker pronounced Lincoln National, Principal Financial, Hartford (NYSE: HIG ) , and Unum (NYSE: UNM ) worthy of only "equalweight" ratings. But the banker's significantly more optimistic about the industry as a whole, pronouncing it "attractive" and due for improved earnings, return on equity, and "modest multiple expansion which should lead to increased stock prices." Both Prudential (NYSE: PRU ) and Ameriprise (NYSE: AMP ) received brand-new "buy" ratings from Barclays. According to the banker, the best bargains of all are Aflac (NYSE: AFL ) and MetLife (NYSE: MET ) .
So what?
So some banker over in London Town says U.S. insurers are cheap. What do they know? Possibly, quite a lot. According to our CAPS stats, Barclays Capital is one of the very best stock pickers around, getting roughly 57% of its stock picks right, and outperforming nearly 98% of the investors we track on CAPS.
So it's worth taking note when it points out that insurance stock "valuations ... are currently below historical average levels based on forward P/E as well as price-to-book ... and also appear attractively valued compared to the P&C [property and casualty] insurance stocks."
Mind you, no one's perfect, and even Barclays has made its share of mistakes. Fact is, if you dig deep into the company's record (as we're able to do -- and you can, too! -- on CAPS), you may be surprised to learn that in spite of its superb record overall, Barclays has historically underperformed the market on the majority of its insurance industry picks. Still, when I crunch the numbers, I tend to agree with Barclays on most of its favorites in the industry. While Ameriprise looks expensive to me, MetLife, Prudential, and Aflac do look attractive.
MetLife, for example, sells for 14.5 times earnings today, is expected to grow its earnings at 13.3% annually over the next five years, and pays a 1.7% dividend to its shareholders. Barclays points out that MetLife's purchase of Alico from AIG (NYSE: AIG ) gives the company a "diversified, international platform." With Alico in its pocket, the banker predicts that we could see MetLife's overall return on equity rise as high as 12% (nearly twice today's level) and earnings swell high enough to put the stock at an ultralow 7.5 times forward earnings.
The price tag at Aflac is even more tempting. At just 10.4 times earnings, it's one of the cheapest insurance stocks out there based on an identical 13.3% long-term growth assumption. Even better, Aflac offers a superior 2.3% dividend payout, making it arguably an even better buy than MetLife. (For the record, I also like Prudential at 10.4 times earnings. It's just that with a slower growth rate and stingier dividend payout, it doesn't seem to offer as compelling a bargain as does Aflac.)
Foolish takeaway
I admit that investing in insurance stocks lacks a certain "sex appeal." I doubt, for example, that these kinds of ho-hum investing ideas will appeal to your run-of-the-mill Apple investor. Still, a bargain's a bargain -- and Barclays has proved itself a great finder of bargains, time and again. In adding MetLife and Aflac to its buy list, I think it's done it again.
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