Focus Stock of the Week (AXS)
Buy Low In A Great Industry
Even as the market has had a remarkable rally there are still bargains to buy.
Warren Buffet's long term success has largely been to use insurance companies where he enjoys positive cost of capital. This allowed Berkshire Hathaway to own great businesses with leverage while being paid for the privilege. It is like individual investors using margin accounts to buy twice as much stock as they can afford and be paid interest for taking on the margin loan.
Managed correctly the insurance industry is a fantastic business model. They collect premiums today to insure risk that may occur decades in the future. If they receive more premium than they pay out in claims this is an underwriting profit. Before claims are paid the premium is considered float which the company can use to invest in many different asset classes. By earning underwriting profits the company is paid to manage investments and receives any dividends, interest and capital gains as additional profit. This can be thought of as being paid a fee (positive cost of capital) for managing other people's money.
Today leading insurance company Axis Capital (ASX) is trading at a discount. This is a property and casualty insurer with exposure to areas with the strongest pricing and growth such as cybersecurity and renewable energy.
The company currently trades cheaper than the top 10 insurers based on price to book. At 0.77 P/B you are buying the company for the cheapest valuation since 2011. Insurance companies were hit particularly hard in the current market volatility but the management team has a solid track record and should be able to recover over the next several years while taking market share from the competition.
If you thought about adding insurance companies to your portfolio for long term growth, it is a good time to own AXS.
Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.
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