As a dollar-cost-averaging (DCA) investor, I love watching for stock price dips from my favorite stocks. This is particularly true when these drops appear to be short-term in nature and have no real bearing on the long-term objectives of the underlying business.
Sea Limited (SE 0.05%) and Kinsale Capital (KNSL -17.31%) perfectly exemplify this disconnect. Despite being home to niche-leading operations, their share prices have dropped over 17% in the last month due to short-term earnings worries.
However, with the investment thesis for these market leaders perfectly intact, I'm thrilled to add to these top stocks while they're on sale. Here's what sets them apart from the crowd.
1. Sea Limited
Sea's Shopee business unit is the largest e-commerce platform in Southeast Asia and Taiwan. In the third quarter of 2023, it completed over 2.2 billion orders and generated $20.1 billion in gross merchandise value (GMV). These sales give Shopee a 40%-to-50% market share in its geographic niche within the e-commerce landscape. This leadership position is even more exciting for investors because Southeast Asia is the fastest-growing e-commerce region globally, having delivered 19% growth in 2022.
Despite this very promising and straightforward investment thesis, Sea's stock has been crushed -- down 90% from its all-time highs as its growth slowed to a crawl.
With its sales growth slowing from consistently above 100% between 2019 and 2021 to just 5% in its latest quarter, Sea watched its premium valuation get reeled in by the market. However, several reasons remain for investors to be excited about Sea's prospects -- especially after yet another 20% dip following its latest earnings.
First, Shopee and SeaMoney (Sea's digital financial services unit) delivered 18% and 37% revenue increases in Q3 respectively, highlighting that the two segments continue to thrive in tandem.
Second, Garena (Sea's digital entertainment unit) is finally starting to rebound after being the primary culprit for the company's dramatic growth slowdown. Growing sales 12% quarter over quarter, Garena saw its largest game, Free Fire, become the most downloaded mobile game globally in Q3. This could indicate that Garena's recovery has legs, which is vital for Sea, as the unit still generates most of the company's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization).
Finally, and perhaps most importantly to investors, Sea's overall efficiency continues to improve, as evidenced by its steadily rising gross profit margin.
SE Gross Profit Margin data by YCharts
This metric is critical for Sea investors as it demonstrates the company's ability to continue streamlining its e-commerce operations. Furthermore, Sea previously generated an 11% net profit margin in Q2, demonstrating it is capable of profitability but would rather gain market share through new investments in its e-commerce network.
Trading at an all-time low price-to-sales (P/S) ratio of 1.7, Sea looks attractively priced, especially with $7.9 billion in cash on hand free to rejuvenate its growth story.
2. Kinsale Capital
Kinsale Capital is the only pure-play excess and surplus (E&S) insurer on the publicly traded markets. Operating exclusively in this E&S niche, Kinsale insures various risks for unconventional customers such as sightseeing railroads, blood banks, paintball facilities, and pest control contractors.
Focusing on these smaller, "hard-to-place" risks, Kinsale offers insurance to customers that might go ignored by the company's larger, more diversified peers. While these risks may be more challenging to quantify, they allow Kinsale to maintain attractive pricing due to less competition. Most importantly for investors, Kinsale uses its proprietary technology to store more than 15 years' worth of E&S insurance data that its in-house underwriting team can use.
This proprietary technology and in-house underwriting help Kinsale maintain best-in-class profitability metrics, as evidenced by its 75% combined ratio in the last quarter. Combined ratios are a company's underwriting losses plus its expenses divided by total premiums earned, with a figure below 100% indicating profitability. This makes Kinsale's 75% combined ratio incredible and helps explain how the company recorded a return on equity of 34% in its most recent quarter.
Despite this incredible profitability, Kinsale's stock dropped over 20% a day after earnings earlier in November as gross written premiums grew by "only" 33%.
While this 33% increase is a slight dip from the company's 41% annual growth rate since 2018, it seems like a significant overreaction from the market. This is especially true as Kinsale's net income more than doubled. Similarly, its investment income from its steadily growing $2.6 billion investment portfolio rose 96%.
Making the market's reaction all the more befuddling is the fact that Kinsale's founder and CEO, Michael Kehoe, has been warning for multiple quarters that the E&S market was in a clear boom cycle and would inevitably slow. Over the longer term, he believes that the E&S market will normalize between 10% and 20% growth -- which would still be plenty of growth for Kinsale, especially considering its lengthy track record of growing faster than the market.
Despite rapidly expanding its initially tiny insurance operations -- growing its market capitalization from less than $1 billion in 2016 to $8 billion today -- Kinsale still only holds a 1% share of the massive E&S insurance industry. This leaves a gigantic growth runway ahead of the company as it uses its exclusive focus on the niche as a competitive advantage.
Following its 20% decline over the last month, Kinsale's stock trades with a price-to-earnings (P/E) ratio of 30.
KNSL PE Ratio data by YCharts
While slightly higher than the S&P 500's average of 25, Kinsale's P/E ratio is 25% below its historical averages and looks pretty reasonable considering its blistering growth rates. Home to best-in-class operations, Kinsale looks like a perfect dollar-cost-averaging buy after the market's short-term overreaction.
