This Is, Without a Doubt, the Most Undervalued Financial Stock

The European sovereign debt dilemma has created a melting pot of worries in the financial sector. Like an airborne contagion somewhat reminiscent of what we saw in 2008 during the credit crisis, financial stocks are being taken to the woodshed whether or not they have European debt exposure.

Another way to look at this mindless drubbing is that it has pushed shares of a handful of financial companies to well below their book values. Clearly, some companies fully deserve the worry built into their stock price, like Bank of America (NYSE: BAC  ) , which is fending off lawsuits from both AIG (NYSE: AIG  ) and the Federal Housing Finance Agency. Others are mired in battles that question their credibility, like UBS (NYSE: UBS  ) , which has seen losses balloon to $2.3 billion from one rogue trader's activity.

No matter how you look at it, though, there are potential bargain-basement values to be had, and I think I've found the creme de la creme.

The best thing about this company is you have probably never heard about it -- and neither has most of Wall Street. Flying under the radar at just 42% of book value is National Western Life Insurance (Nasdaq: NWLI  ) , a life insurance and annuity provider that caters to Central and South America, Eastern Europe, Asia, and the Caribbean.

What makes National Western Life Insurance so special is its methodically conservative approach to growth that produces solid results in a variety of economic environments. The company manages an investment portfolio of $7.8 billion, with 98% of those investments being rated as investment grade. (Their average rating is A+.) As per the company's annual report, its investment portfolio is so diverse that its largest bond holding, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , comprised only 0.4% of its holdings at the end of 2010.

Let's talk a little bit about management and its responsibility to shareholders. Chairman and CEO Robert Moody has manned the helm of this profitable beast since 1981. Even over the past difficult decade, book value per share has grown by an astonishing 8.6% per year. Also in that time, the total dollar amount of life insurance in force doubled to $19.7 billion, with the company remaining healthfully profitable each and every year.

Still skeptical? Let's take a look at how its current valuation matches up to its historical valuation. Over the past five years, National Western has traded at an average P/E of 11.9 and a price-to-sales of 1.3. Based on its trailing-12-month P/E of 8.1 and its decade-low price-to-sales of 0.7, these figures would appear to indicate that this company is being grossly undervalued (as if the fact that it closed at $144.78 with a book value of $345.69 didn't already give that away).

One final amazing fact about National Western: Despite a worldwide recession just a few years ago, insurance revenue grew every year over the past five years at an average rate of 3.1% per year.

You don't always have to be the hare to win the race. National Western Life Insurance has made a habit of trading below its book value for a long time now, but I think that could be about to change. As investors seek out conservative investments with strong management and clear growth patterns to weather these uncertain economic times, National Western could be a company that pops up on many investors' stock screens.

Agree? Disagree? State your case in the comments section below and consider adding National Western Life Insurance to your watchlist.

Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Bank of America, AIG, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that pays out truth daily.


Read/Post Comments (5) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 19, 2011, at 10:52 PM, foodjack wrote:

    The drastic reduction in rates of return earned by NWLI 's investment portfolio are reflected in the ratio of the share price to book value.

  • Report this Comment On September 20, 2011, at 2:02 PM, TEBuddy wrote:

    Diversification doesn't impress me so much.

    I like having diversification, but a few front runners that are going to give me expected high growth in the next few years.

  • Report this Comment On September 27, 2011, at 7:37 PM, asdfk123 wrote:

    I started picking up shares of NWLI back in July. I think NWLI will be a good long-term investment.

  • Report this Comment On September 30, 2011, at 5:03 PM, boghead wrote:

    One thing to watch out for with this company is that the common shares are basically only a third of the company -- they only control one third of the board seats. The Class B shares -- all owned by the Moody family -- control two thirds of the board. You can argue about how good or bad it is for the company that they aren't at the whims of the common stock holders, but it also affects the intrinsic value of each share.

  • Report this Comment On February 24, 2012, at 9:23 PM, Mega wrote:

    There are always doubts in investing, nothing is ever "without a doubt" unless you are trolling for page views.

    NWLI is cheap and I may buy shares soon. On the other hand, I suspect there are at least a few financial stocks that are cheaper and will produce higher returns over the next 3-5 years. In particular I own shares of SYA, PKBK and AORE.PK.

    As I've read elsewhere, cautious investing to all.

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