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It’s been a rough start to the year for most U.S. equities. Both the Nasdaq and S&P 500 suffered some of their worst monthly performances on record in January.
After a prosperous 2021, investors may have begun to see some red in their portfolios after this broad-based decline. Holding on to losing stocks is a surefire way to achieve underperformance. Successful portfolio management is all about making sure our losers don’t get out of hand.
In order for a stock to recover from a 50% loss, it would need to advance 100% just to get back to even ground. As the percentage loss becomes more severe, the required gain to recover that loss becomes more drastic. The mathematical relationship between losses and gains is nonlinear, and this is why it is so important to cut your losers early before they become detrimental to your investing performance. If you were to hold on to a 75% loser, the stock would need to surge 300% from that low - not exactly putting the odds in our favor as investors.
We want to do just the opposite. We aim to get odds on our money and practice asymmetry, in which the potential risk is much less than the potential reward. Our job is to find out what the market is doing and follow it, not try to predict what is going to happen. We’re not in the business of making predictions – we’ll leave that to the economists (most of whom still get it wrong much of the time). We’re in the business of making money.
Many investors have painfully held on to growth stocks through their recent downturn. While these stocks have risen off the January lows, most of these companies are still in sustained downtrends. It may be tempting to try and pick a bottom for a favorite growth story or add to a beaten down name at cheaper prices. The problem with this is that as an investor, adding to losers is tilting the scale toward the risk side of the equation. There’s a big difference between adding to a winning position and adding to a losing one.
A more optimal approach would be to analyze how the market is behaving and identify which sectors, industry groups, and individual stocks are leading the market. Putting money to work in a leading stock offers a much more balanced risk/reward ratio than a stock that is consistently making lower lows.
On that note, our proprietary Zacks’ systems and indicators are continually detecting leading stocks. One way to utilize our systems is to employ a top-down approach by identifying the top sectors first. The Zacks – Finance sector is currently ranked #1 out of all 16 sectors. This simply means that more stocks within this sector are experiencing upward earnings estimate revisions than other sectors.
We know that based on the Zacks model, our most profitable stocks will be those with upward earnings estimate revisions. Within the Finance sector, the Insurance – Property and Casualty industry group is currently ranked in the top 33% of all Zacks Ranked Industries. Because it is ranked in the top half of all industry groups, we expect it to outperform the market over the next three to six months. Seven companies within this industry group have reported earnings for the prior quarter, and all seven have beaten estimates.
Having located a top sector and industry group for finding leading stocks, we can now view individual companies that are ranked favorably by our Zacks Rank system. Below we will analyze three insurers that are outperforming the market to kick off the new year.
W.R. Berkley is an insurance holding company. A Fortune 500 firm, WRB is one of the nation’s largest commercial lines property casualty insurance providers. The company functions via two segments – Insurance and Reinsurance. The Insurance segment underwrites commercial insurance business including commercial automobile, property, products liability, and professional liability lines. It also provides workers’ compensation insurance and accident and health insurance products. The Reinsurance segment provides other insurance companies and self-insureds with support in managing their risk through reinsurance. W.R. Berkley was founded in 1967 and is based in Greenwich, CT.
WRB’s competitive advantage lies in their long-term strategy of decentralized operations, which allows each segment to quickly and effectively respond to changing market conditions. The Insurance segment accounted for 87.4% of net premiums last year, while the Reinsurance segment was responsible for 12.6%. The company also boasts a strong balance sheet with sufficient liquidity and cash flows, which helped WRB management approve an 8% dividend hike in June of last year. This hike marked the 16th consecutive increase since 2005. WRB also bought back company shares worth $122 million in 2021.
A Zacks #1 Strong Buy, WRB has exceeded earnings estimates in each of the past six quarters. The company has delivered a trailing four-quarter average earnings surprise of 27.53%. It most recently reported EPS this month for the quarter ending in December of $1.53, a 26.45% positive surprise over consensus estimates. WRB stock has rewarded shareholders over the past year with a nearly 40% return.
W.R. Berkley Corporation Price and EPS Surprise
Analysts are in agreement in terms of earnings estimate revisions. Estimates for 2022 have increased by 5.41% in the past 60 days. The Zacks Consensus Estimate for current-year EPS now stands at $5.26, translating to growth of 3.92% relative to last year. Sales are expected to move higher by 13.76% to $10.53 billion.
First American Financial is a financial services company. The company serves homebuyers and sellers, real estate professionals, loan originators and services, and other professionals involved in residential and commercial property transactions. FAF operates through two segments – Title Insurance and Services, and Specialty Insurance. The Title Insurance and Services segment provides title insurance policies and offers escrow and real estate closing services. The Specialty Insurance segment offers property and casualty insurance including homeowners’ insurance. First American Financial is headquartered in Santa Ana, CA.
FAF is likely to continue to benefit from strength in its commercial business and increased demand among millennials for first-time home purchases. Purchase transactions generate more than twice the revenues of refinance transactions. Low housing inventories will therefore drive further price appreciation and in turn boost revenues. After witnessing a slowdown owing to the COVID-19 pandemic, the housing market has bounced back and the company anticipates strong purchase and refinance activity to continue in 2022.
A Zacks #2 (Buy) stock, FAF has strung together a noteworthy history of earnings surprises as it has missed estimates just one time in the past five years. FAF most recently reported Q3 earnings back in October of $2.15, a healthy +29.52% surprise over the $1.66 consensus. The company has posted an average earnings beat of +29.19% over the past four quarters, aiding the stock’s 45.13% return in the past year.
First American Financial Corporation Price and EPS Surprise
FAF trades at a relatively undervalued 11.46 forward P/E. Analysts covering FAF have recently revised last year’s full EPS estimates upward by +1.06%. The Zacks Consensus Estimate now sits at $7.61, which would represent growth of 39.63% relative to 2020. Sales are anticipated to have grown by 23.6% to $8.76 billion. The company is due to report its fourth quarter results on February 10th.
No conversation around insurance companies would be complete without mentioning Berkshire Hathaway. The long-term stock market winner run by its famous Chairman and CEO Warren Buffett began as a group of textile milling plants. Today BRK.B is a holding company for a multitude of businesses – including its insurance interests. Berkshire Hathaway provides property, casualty, life, accident, and health insurance and reinsurance. Although founded much earlier, BRK.B was incorporated in 1998 and is headquartered in Omaha, NE.
Berkshire is one of the largest property and casualty insurance companies by premium volume. Its Insurance group accounts for over half of company revenues and includes GEICO, which writes private passenger automobile insurance; General Re, which offers property, casualty, life and health coverage; Berkshire Hathaway Reinsurance Group, which underwrites reinsurance policies; and Berkshire Hathaway Primary Group, which is comprised of a wide variety of independently-managed insurance businesses.
Berkshire Hathaway Inc. Price and EPS Surprise
BRK.B has averaged a 5.53% positive earnings surprise over the past four quarters. The stock has followed suit, returning investors north of 37% over the past year. The Zacks Consensus Estimate for 2021 full-year EPS calls for growth of 28.24% to $11.76. BRK.B is set to report its final ’21 quarterly slate on February 25th.
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Don't Fight The Market - Follow It Instead
Don’t fight the market.
It’s been a rough start to the year for most U.S. equities. Both the Nasdaq and S&P 500 suffered some of their worst monthly performances on record in January.
After a prosperous 2021, investors may have begun to see some red in their portfolios after this broad-based decline. Holding on to losing stocks is a surefire way to achieve underperformance. Successful portfolio management is all about making sure our losers don’t get out of hand.
In order for a stock to recover from a 50% loss, it would need to advance 100% just to get back to even ground. As the percentage loss becomes more severe, the required gain to recover that loss becomes more drastic. The mathematical relationship between losses and gains is nonlinear, and this is why it is so important to cut your losers early before they become detrimental to your investing performance. If you were to hold on to a 75% loser, the stock would need to surge 300% from that low - not exactly putting the odds in our favor as investors.
We want to do just the opposite. We aim to get odds on our money and practice asymmetry, in which the potential risk is much less than the potential reward. Our job is to find out what the market is doing and follow it, not try to predict what is going to happen. We’re not in the business of making predictions – we’ll leave that to the economists (most of whom still get it wrong much of the time). We’re in the business of making money.
Many investors have painfully held on to growth stocks through their recent downturn. While these stocks have risen off the January lows, most of these companies are still in sustained downtrends. It may be tempting to try and pick a bottom for a favorite growth story or add to a beaten down name at cheaper prices. The problem with this is that as an investor, adding to losers is tilting the scale toward the risk side of the equation. There’s a big difference between adding to a winning position and adding to a losing one.
A more optimal approach would be to analyze how the market is behaving and identify which sectors, industry groups, and individual stocks are leading the market. Putting money to work in a leading stock offers a much more balanced risk/reward ratio than a stock that is consistently making lower lows.
On that note, our proprietary Zacks’ systems and indicators are continually detecting leading stocks. One way to utilize our systems is to employ a top-down approach by identifying the top sectors first. The Zacks – Finance sector is currently ranked #1 out of all 16 sectors. This simply means that more stocks within this sector are experiencing upward earnings estimate revisions than other sectors.
We know that based on the Zacks model, our most profitable stocks will be those with upward earnings estimate revisions. Within the Finance sector, the Insurance – Property and Casualty industry group is currently ranked in the top 33% of all Zacks Ranked Industries. Because it is ranked in the top half of all industry groups, we expect it to outperform the market over the next three to six months. Seven companies within this industry group have reported earnings for the prior quarter, and all seven have beaten estimates.
Having located a top sector and industry group for finding leading stocks, we can now view individual companies that are ranked favorably by our Zacks Rank system. Below we will analyze three insurers that are outperforming the market to kick off the new year.
W.R. Berkley Corp. (WRB - Free Report)
W.R. Berkley is an insurance holding company. A Fortune 500 firm, WRB is one of the nation’s largest commercial lines property casualty insurance providers. The company functions via two segments – Insurance and Reinsurance. The Insurance segment underwrites commercial insurance business including commercial automobile, property, products liability, and professional liability lines. It also provides workers’ compensation insurance and accident and health insurance products. The Reinsurance segment provides other insurance companies and self-insureds with support in managing their risk through reinsurance. W.R. Berkley was founded in 1967 and is based in Greenwich, CT.
WRB’s competitive advantage lies in their long-term strategy of decentralized operations, which allows each segment to quickly and effectively respond to changing market conditions. The Insurance segment accounted for 87.4% of net premiums last year, while the Reinsurance segment was responsible for 12.6%. The company also boasts a strong balance sheet with sufficient liquidity and cash flows, which helped WRB management approve an 8% dividend hike in June of last year. This hike marked the 16th consecutive increase since 2005. WRB also bought back company shares worth $122 million in 2021.
A Zacks #1 Strong Buy, WRB has exceeded earnings estimates in each of the past six quarters. The company has delivered a trailing four-quarter average earnings surprise of 27.53%. It most recently reported EPS this month for the quarter ending in December of $1.53, a 26.45% positive surprise over consensus estimates. WRB stock has rewarded shareholders over the past year with a nearly 40% return.
W.R. Berkley Corporation Price and EPS Surprise
Analysts are in agreement in terms of earnings estimate revisions. Estimates for 2022 have increased by 5.41% in the past 60 days. The Zacks Consensus Estimate for current-year EPS now stands at $5.26, translating to growth of 3.92% relative to last year. Sales are expected to move higher by 13.76% to $10.53 billion.
First American Financial Corp. (FAF - Free Report)
First American Financial is a financial services company. The company serves homebuyers and sellers, real estate professionals, loan originators and services, and other professionals involved in residential and commercial property transactions. FAF operates through two segments – Title Insurance and Services, and Specialty Insurance. The Title Insurance and Services segment provides title insurance policies and offers escrow and real estate closing services. The Specialty Insurance segment offers property and casualty insurance including homeowners’ insurance. First American Financial is headquartered in Santa Ana, CA.
FAF is likely to continue to benefit from strength in its commercial business and increased demand among millennials for first-time home purchases. Purchase transactions generate more than twice the revenues of refinance transactions. Low housing inventories will therefore drive further price appreciation and in turn boost revenues. After witnessing a slowdown owing to the COVID-19 pandemic, the housing market has bounced back and the company anticipates strong purchase and refinance activity to continue in 2022.
A Zacks #2 (Buy) stock, FAF has strung together a noteworthy history of earnings surprises as it has missed estimates just one time in the past five years. FAF most recently reported Q3 earnings back in October of $2.15, a healthy +29.52% surprise over the $1.66 consensus. The company has posted an average earnings beat of +29.19% over the past four quarters, aiding the stock’s 45.13% return in the past year.
First American Financial Corporation Price and EPS Surprise
FAF trades at a relatively undervalued 11.46 forward P/E. Analysts covering FAF have recently revised last year’s full EPS estimates upward by +1.06%. The Zacks Consensus Estimate now sits at $7.61, which would represent growth of 39.63% relative to 2020. Sales are anticipated to have grown by 23.6% to $8.76 billion. The company is due to report its fourth quarter results on February 10th.
Berkshire Hathaway Inc. (BRK.B - Free Report)
No conversation around insurance companies would be complete without mentioning Berkshire Hathaway. The long-term stock market winner run by its famous Chairman and CEO Warren Buffett began as a group of textile milling plants. Today BRK.B is a holding company for a multitude of businesses – including its insurance interests. Berkshire Hathaway provides property, casualty, life, accident, and health insurance and reinsurance. Although founded much earlier, BRK.B was incorporated in 1998 and is headquartered in Omaha, NE.
Berkshire is one of the largest property and casualty insurance companies by premium volume. Its Insurance group accounts for over half of company revenues and includes GEICO, which writes private passenger automobile insurance; General Re, which offers property, casualty, life and health coverage; Berkshire Hathaway Reinsurance Group, which underwrites reinsurance policies; and Berkshire Hathaway Primary Group, which is comprised of a wide variety of independently-managed insurance businesses.
Berkshire Hathaway Inc. Price and EPS Surprise
BRK.B has averaged a 5.53% positive earnings surprise over the past four quarters. The stock has followed suit, returning investors north of 37% over the past year. The Zacks Consensus Estimate for 2021 full-year EPS calls for growth of 28.24% to $11.76. BRK.B is set to report its final ’21 quarterly slate on February 25th.