Hartford Financial Gained 30%, Is It Still Attractive?

Despite a 30% rise since the March 23 lows of this year, at the current price of around $40 per share we believe Hartford Financial’s stock (NYSE: HIG) has some upside potential. Hartford Financial’s stock has rallied from $31 to $40 off the recent bottom compared to the S&P which moved 39%. While investor sentiment toward insurance companies has improved over the recent weeks driven by government stimulus and net market gains, Hartford Financial is slightly behind the overall market as investors are cautious about the impact of the slowdown on its business insurance offerings. Further, it is still down 32% from levels seen in late 2019.

Hartford Financial’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has some more potential based on its historical PE.

Some of this rise of the last 3 years is justified by the roughly 29% growth seen in Hartford Financial’s revenues from 2016 to 2019, which translated into a 130% growth in Net Income. The net income benefited from a sharp decrease in the expense figure in terms of % of revenues – mainly driven by insurance claims and benefits cost, and insurance operating costs. Further, it also improved the net income margin from 5.6% in 2016 to 10% in 2019.

While the company had steady revenue and earnings growth over recent years, its PE multiple has actually decreased. We believe the stock is likely to see some upside after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard ‘What Factors Drove 35% Change In Hartford Financial Stock Between 2016 And 2019?’ has the underlying numbers.

Hartford Financial’s PE multiple changed from around 19x in 2016 to 10.5x at the end of 2019. While the company’s PE has declined to about 7x now, there is some potential upside when the current PE is compared to levels seen in the past years – PE of 10.5x at the end of 2019 and 8.5x as recent as late 2018.

So what’s the likely trigger and timing for further upside?

Hartford Financial’s stock has suffered as states and countries are on lockdown due to Coronavirus pandemic. The company generates its revenues mainly from insurance premiums and fees, and income from investment of insurance premiums. While the slowdown could adversely affect its premiums as businesses and individuals would be more focused on the short term, lower investment yields can further accelerate its problems in the near term. Notably, the recent improvement in the securities market has given some hope to the investment revenue stream. While the Q1 2020 results were on similar lines, we believe that Q2 results will confirm the hit to its revenue. It is also likely to accompany a lower Q3 as-well-as 2020 guidance.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

While Hartford Financial’ stock presents some upside potential, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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