By Michael Brush, MarketWatch
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In the hunt for COVID-19 plays, investors have fallen head over heels for “work-at-home” stocks and companies in vaccines and therapies.
This makes sense. But smart investors are looking beyond the classic virus beneficiaries to snap up an unusual lot of COVID-19 stocks — insurers /zigman2/quotes/205505650/composite KIE -0.03% .
Unlike favored virus stocks like Zoom Video /zigman2/quotes/211319643/composite ZM +2.20% , Teladoc Health /zigman2/quotes/207420252/composite TDOC +9.16% , Novavax /zigman2/quotes/202614340/composite NVAX +3.53% and Moderna /zigman2/quotes/205619834/composite MRNA +12.20% , insurers won’t directly benefit from the virus. Quite the opposite. It looks like they are going to get hit hard by business interruption claims, meddling politicians who want to “socialize” virus-related losses, and a prolonged slowdown that could cripple demand.
But here’s the catch: Investors are overly worried about these concerns. These false fears have driven insurers down to really attractive levels.
While Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.69% hits new highs and the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.36% and Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.12% get closer to their own records, many insurers are down 30% or more year to date. Insurers typically trade at around 1.2 times book value, but they’ve been knocked down to the 0.8 range. The relative performance of Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A +0.37% /zigman2/quotes/200060694/composite BRK.B +0.04% to the S&P 500 is around a 19-year low.
Despite this terrible performance, underlying industry trends that many investors don’t recognize are about to drive outsized profits at insurers for years.
“This is one of the best buying opportunities I have ever seen, and I have been covering the group since 1998,” says Greg Locraft, an equity analyst for T. Rowe Price. “Don’t worry too much about the individual names. Just get money on the table.”
We’ll get to six names in a second. But first let’s look at the three main reasons why insurers look very really here.
1. Insiders are buying big time
One of the key themes I look for at my stock newsletter Brush Up on Stocks is broad, sector-wide buying by corporate insiders. That’s clearly the case with insurers.
There’s been very large (in many cases $1 million worth or more per company) insider buying at about a dozen insurance companies in the past several weeks. It’s happening across the space, from life insurance and annuity companies to workers’ compensation, home mortgage and auto insurance companies.
The biggest buying has been happening at property and casualty insurers and insurance brokers. They’re the ones that will benefit most by the favorable COVID-19-related trends. So we will focus on those as suggested stocks to consider.
2. The insurance market is turning in favor of the insurers
Insurance company investing calls for a twisted logic: Bad is good. And it looks like things are getting really bad (good) right now. Here’s why.
On top of all the weird storms and wildfires this year, insurers are going to get hit with large COVID-19 related claims. All these claims will cost them money — or capital. In this business, capital is capacity because to write insurance you need money on hand to back potential claims. Whenever capacity declines in an industry, this creates shortages that drive up prices. Those higher prices will be great for insurers and their investors in the coming years.