Stocks for the Long Run Archives

Why SM Energy (SM) is a Growth Stock to Watch

Most investors know that growth stocks can be some of the most exciting stocks on the market. The reason is that they tend to catch the attention of other investors and thus produce big gains. Everything that goes up must come down however and, when the growth is over and the downside begins, finding companies that still have strong growth prospects is the most important factor for an investor looking for a good stock that will provide top-notch long-term gains.

SM Energy Company (SM) is one of those companies, and it appears to be very well-positioned for excellent earnings growth in both the near and outlying future. With an EPS growth just shy of 260% last year, this Oil-US Exploration and Production company is looking good for 2014 as well. As a matter of fact, current growth estimates for 2014 are calling for a 55.6% earnings per share growth which is very strong.

At 17.77%, the long-term growth rate that SM Energy Company now has is suggestive of excellent long-haul prospects.  Add that to the 1.67% rise in estimates over the past month for the  current fiscal year and you have an excellent stock on your hands with a very high potential for outperforming the industry.

If a fast-growing stock with a lot more opportunities in the future is the kind of stock that you are searching for, SM Energy Company should definitely be a stock that you consider purchasing soon. Right now it not only has  and earnings growth prospect in the double digits but most analysts predict that it will do quite well in the future.

Keep in mind that while SM Energy is no longer a growth stock, analysts believe that it will do quite well in the long run, making it a stock that should fit well into any investor’s portfolio.

Insurance company stock is a great way to get solid returns, especially if you buy in at a good time. Aflac (NYSE – AFL) is, right now, an excellent buy due to its recent post earnings pullback and, in our opinion, could easily be chosen over other insurance rivals like The Hartford and Berkshire Hathaway (which is quite diversified but also heavily insurance oriented).

How exactly do insurance companies make money?

Business models vary of course but insurance companies, generally speaking, all use the same set of basic principles to make their money. Their founding principle of course is to collect premiums from their customers in exchange for the promise to pay restitution if something negative happens to their property or assets. Due to this fact, most keep their collected premiums in a reserve fund so that, when the time comes for them to pony up huge amounts of cash, they’re able to do that without a problem.

The fact that most consumers don’t know is that the actual insurance premiums by themselves are not actually designed to be profitable. Just like a movie theater makes more money on their junk food than they do on the actual sale of movie tickets, an insurance company makes more money on their reserve account, and the way they invest it, not on the actual insurance premiums. If you’re wondering how the famous Warren Buffett has been so hugely successful with Berkshire Hathaway, it’s because of this very fact. Indeed, Mr. Buffett has remarked on several occasions that “our primary business is insurance”.

The true nature of Aflac.

Aflac offers a wide variety of supplemental life and health insurance policies including cancer, care, traditional life insurance, annuities and living benefit life plans. Something that most investors don’t realize is that the bulk of their earnings (nearly 80%) come from Japan rather than the United States. Indeed, they have an extensive range of channels in Japan where they sell their insurance products including over 90% of Japan’s banks and in over 1000 of their post offices, which coincidentally happen to be one of the most popular places for Japanese people to buy their insurance.

Most people who purchase Aflac’s supplemental insurance already have major medical in the United States. The reason that the average consumer gets there supplemental insurance from Aflac is that, when they have a claim, the company pays them in cash directly. In the last decade their success has been phenomenal due to their popular marketing approach, and company revenues have soared.

Aflac’s Performance and Price.

Currently Aflac’s stock is priced at 9.8 times earnings, a price well below their historic valuation multiple. When you compare them to their peers they appear to be an even better buy as, for example, The Hartford trades at a valuation comparable to Aflac but has a history of extremely shaky earnings. Berkshire Hathaway has an obvious track record of great success but that success is very costly as their shares currently trade for over 19 times what this year’s  earnings are expected to be.

What’s the reason that Aflac is priced so cheaply?

Insurance companies make money, as we said earlier, by investing their reserve funds. Thus when you have a low interest rate environment you find that returns are usually below average. Since Aflac invests in low risk investments, their yields aren’t especially high and a change of even 1 percentage point can have a huge impact on their bottom line, something that’s especially true when you have investment assets to the tune of about $116 billion.

The reason that they have had lower profit margins over the past several years is because their return on investments has gone down significantly. However, once interest rates begin to increase a similar 1 percent increase in returns will amount to approximately 1.16 billion in additional earnings for the company, an increase of about 40% over their profits this year. For that reason now may be the best time to purchase their stock before the rest of the market realizes Aflac’s huge earnings potential.

 

Symbol JPM

I am currently long on JP Morgan Chase & Co. ( Symbol JPM ). You might be taken back by that statement with all of the recent bad press related to large losses from bad investments, but does anyone even look at fundamentals anymore? JP Morgan is making hand over fist money and has a P/E of about 7.5!

Absolutely insane that this stock has performed so poorly, regardless of the bad media. In fact, despite the investment loss, JP Morgan is still expected to report a giant gain for the second quarter (most likely over $3 billion). Furthermore, the last 4 years of performance (before taxes): +$26.74B, +24.85B, +16.06B, +2.77B. That is $70 billion dollars (before tax) from 2008 until the end of 2011. Market Cap of JPM, only $129.58 billion.

Now of course you have to decide which factors and heavily you weight those factors when deciding on investment decisions (disclaimer: consult a professional), but how much sweeter does this stock get?

  • P/E of 7.5
  • Making money hand over fist, even AFTER massive mistakes
  • Has a dividend
  • Market Cap is drastically undervalued compared to 4 year performance (in my opinion)
  • Heavily institutionally owned stock (74%).
  • Has flirted with the $40+ range numerous times within the last 2.5 years. Note: $40 would be a +17.5% gain from today’s closing price.

If you are looking for a long-term stock, I think JP Morgan and Co. ( Symbol JPM ) should probably be in the running for a portion of your portfolio. Honestly I wouldn’t be surprised if this stock hit $45-50 by the end of 2012.

Stocks for the Long Run: Metlife

Long StocksLong Investing

Today I am introducing Epic Finance’s first Stocks for the Long Run, a series of posts that will highlight what stocks I personally have in my brokerage account.

Today’s Stocks for the Long Run post is focusing on Metlife. I recently had some cash laying around (mainly from my tax return) and tossed it into my brokerage account. I decided I wanted a strong fundamental stock which I could write “cover calls”. “Cover calls” are when you sell an option to a stock that you own. Just think about it this way, if someone “calls” or executes the option, you have the stock to “cover” the “call.”

Why Metlife? This company has been around since 1868, this company is definitely in it for the long run. More importantly it has a P/E less than 6! Did I mention a dividend of about 2% yearly?

Metlife Long

Forget all the Pandora and Yelps of the stock market, this company is making money and is fundamentally strong. I would even argue that the market is very optimistic about this current year for Metlife by looking at the option chains. I purchased the stock for $38.42 and shortly after, wrote an option to call the stock for $45 by Jan 19th, 2013 for a premium of $192 (5%).

That option I sold was $6.58 “out of the money,” meaning that the stock could appreciate $6.58 before the option would be executed (45 – 38.42). If the stock did appreciate and the stock was taken from me come January or before, I would have made $6.58 + $1.92 = $8.50 a share (or 22.1%+dividends in about 10 months). That of course would be the best case scenario. I don’t expect that kind of return, but I do think it is viable this move can and will return hopefully in the double digit percentage range.

If the market turned against me (as it did today) I have $1.92 worth or 5% of downward protection from the premium from the option. I want to be completely clear though, I am long on this stock. I plan on having this stock for a while and most likely this won’t be the only option I sell on the stock.

That is the first ever Stocks for the Long Run post, more to come.

Disclaimer: Do not use information on this website for decision making of any kind, always consult a financial expert.

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