Monday, June 09, 2014
Investing in Insurance Sales Earnings Growth
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Make no mistake about it, this market is on fire. It really doesn’t matter where you look right now. The Dow, the S&P 500, the NASDAQ and the Russell 2000 are all surging higher after the news of further ECB easing. While this risk-on rally may tempt investors to dump money into tech stocks you may want to take a look at a more traditional business. Growth isn’t just happening in the sexy sectors and stocks, it’s also happening in the tried-and-true insurance business. One of the companies in this industry is our Bull of the Day, Federated National Holding Company (FNHC).
Federated National Holding Company is a vertically integrated insurer operating through Federated National Insurance Company, Federated National Underwriters, Federated National Adjusting and Insure-Link. They underwrite homeowners, commercial, general liability, flood, auto and other insurance products in multiple states across the Southern US.
Over the last 6 quarters, their network of over 3,500 agents has helped increase the total amount of premium in force for $102.3 million at the end of 2012 to $250.2 million in 1Q2014. This huge growth is helping to fuel the stock price and boost earnings.
The property and casualty insurance industry is in the top 3% of our Zacks Industry Rank. 16 of the 59 stocks in this sector, including FedNat, carry a Zacks Rank #1 (Strong Buy). Aggressive growth is not something you typically see from insurers. FedNat has been so aggressive in the Florida housing insurance market that its earnings estimates have been revised upwards by multiple analysts over the last 60 days.
Consensus for next year’s earnings has increased from $1.48 to $2.05 and the current year from $1.23 to $1.79. This along with surprises to the upside the last two quarters are what have it in the good graces of the Zacks Rank.
Last September, FHNC stock was dragged down to nearly $8. The stochastics were extremely oversold and the stock was trading well below its 25 day moving average shifted by 5 days (25x5). Then little by little price action heated up. In October it peeked its head above the 25x5 after a stochastic buy signal a week earlier.
From November to mid-December a major bull run took FHNC from $11 to $15. Buying slowed down a bit and FNHC retraced back down below the 25x5 and forced stochastics into oversold territory again. Seems like that retrace was exactly what the stock needed as since the mid-February low the stock has more than doubled. Now it’s still firmly in an uptrend and now within earshot of a fresh 52 week high.
The recent support at $20 should provide a great level to part a stop below. This coincides with the 38.2% retracement of the move from the February low to the May high. Since that level held up, the 23.6% extension at $27.32 is the next upside target.
It may be fun in an environment like this to roll the dice on high beta names in volatile sectors. But don’t forget about solid and steady growth stories like the insurance business. Here we have an insurance company aggressively adding customers, increasing premiums and coverage, with the Zacks Rank stamp of approval and a good technical chart.
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