Wednesday, December 13, 2006
Insurance Stocks and Street Research
A fellow blogger on Seeekingalpha suggests several insurance stocks are cheap, though by the manner in which he went about addressing options strategies, it appears he meant that option premiums were rich, and covered options were a workable strategy. As far as any pure "buys", I would challenge the underlying assumption of most of the recommendations. For investors to make decisions based on consensus expectations of year ahead earnings and "valuations", I would say you're misleading those you are apparently trying to help. Its disingenuous to think that a stock with certain P/E and growth rate ranks better or worse than others with similar p/e and differing growth rates. By now, investors should be conversant enough with time tested DCF and ROE valuation models to stay away from P/E valuation metrics, given the inherent cyclicality of the insurance business. And when you are quoting Warren Buffett, it's even more important to show some consistency. I for one will attempt to canvas some of the Street reports in my research, examining some of the key assumptions and doing a more thorough exegesis of consensus opinion (earnings estimates, valuation and balance sheet risks, macro and interest rate assumptions ) especially when my philosophy clashes with II ranked analysts. I believe the timidity of Street analyst reports can be used to hedge fund and individual investors' advantage, if one has the conviction and maps out the the sectoral investment scenario a little more rigorously. A considerable portion of the short term movement in the financial sector stocks is tied to the perception of value associated with changes in interest rates, regardless of the impact on future earnings, though its rarely addressed by subsector analysts. The absence of a comprehensive total financial sector strategy (i.e. ranking subsectors according to their relative attractiveness within the whole S&P financial universe) is a defect in the provision of research by the I Banks. I think some refreshing and timely trading and investing ideas are readily available, for those with some patience and general sector knowledge.