Arch Capital Group Ltd. (ACGL - Free Report) recently decided to go for a three-for-one stock split of common stock. Shareholders of record as of Jun 18 will get two additional shares on Jun 20 for each share held. The company’s common stock is expected to begin trading on a split-adjusted basis from Jun 21. Shares of Arch Capital closed at $83.48 in yesterday’s trading.
Shares of Arch Capital have been consistently trading above $70 since Jun 28, 2016. In fact, for some days in October 2017, shares traded above the $100 mark. Over the last two years, the stock has returned 18.8% compared with the industry’s surge of 36%. Notably, the share price will be slashed by one-third post spilt, making it an attractive pick for potential investors.
Stock split increases the number of outstanding shares of a company without changing the company’s market capitalization. A higher number of shares outstanding translates into lower stock price, making it affordable for shareholders. In fact, shares of Arch Capital are currently trading at a discount to the industry.
The company’s price to book, the best multiple to value insurers because of large variations in their earnings results from one quarter to the next, is 1.24, lying below the industry average of 1.42. Strong fundamentals coupled with favorable industry trends make shares dearer as they trade at a premium. Following a stock split, value of the same shares falls, which in turn, increases a stock's liquidity.
Arch Capital’s robust premium growth owing to a compelling product as well as a solid inorganic portfolio continues to drive long-term growth. The company has also been expanding in U.S. Mortgage Insurance business, complementing its strengths in the specialty insurance and reinsurance businesses.
The P&C insurer has maintained a sturdy capital position over the years, reflecting its financial flexibility. It has also enhanced shareholders’ value through share buybacks and dividend payments. Significant efforts to boost this Zacks Rank #3 (Hold) insurer’s inorganic growth profile drove its private mortgage insurance businesses. The company’s return on equity, a profitability measure, stands at 6%, better than the industry average of 5.3%, which underlines its judicious capital deployment to utilize the shareholders’ funds for better returns.
With the shares being affordably priced post-split, Arch Capital seems a lucrative investment bet given its strong fundamentals and undervaluation. Further, the stock carries a decent Value Score of B and value investors seek undervalued stocks. This deviation from their fair value is what creates an exceptional upside opportunity.
Stocks to Consider
Some better-ranked stocks from the insurance industry are Alleghany Corporation (Y - Free Report) , Markel Corporation (MKL - Free Report) and RLI Corp. (RLI - Free Report) .
Alleghany provides property and casualty reinsurance and insurance products in the United States and internationally. It pulled off an average four-quarter positive earnings surprise of 17.61%. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Markel markets and underwrites specialty insurance products in the United States, the United Kingdom, Canada and globally. The company came up with positive surprises in the last four quarters, the average beat being 15.54%. The stock carries a Zacks Rank #2 (Buy).
RLI Corp. underwrites property and casualty insurance in the United States and internationally. The company delivered an average four-quarter beat of 33.65%. The stock has a Zacks Rank of 2.
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