Hartford Financial Stock Has 40% Growth Potential

We believe that Hartford Financial stock (NYSE: HIG) has an upside potential of 40% in the short term. HIG trades near $40 currently and it has lost 32% in value year-to-date. It traded at a pre-Covid high of $57 in February and is 30% below that level now. Also, HIG stock has gained 34% from the low of $30 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government has helped the stock price recover to some extent. That said the stock is lagging behind the broader markets by a margin (S&P 500 is up 55%), as investors are overly cautious about the impact of lower consumer demand on insurance premiums which contributes a significant revenue share. Further, income from investment of insurance premiums – which is very important for the profitability of any insurance company – has suffered in the second quarter due to lower yields driven by the negative GDP scenario. Despite some improvement in HIG stock since late March, we believe that the stock still has room to grow in the near future. Our conclusion is based on our detailed analysis of Hartford Financial’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 55% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how HIG and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of the S&P 500 index
• 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

Hartford Financial vs S&P 500 Performance Over 2007-08 Financial Crisis

HIG stock declined from levels of around $70 in October 2007 (the pre-crisis peak) to roughly $5 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 93% of its value from its approximate pre-crisis peak. This marked a much higher drop than the broader S&P, which fell by about 51%.

However, HIG recovered strongly post the 2008 crisis to about $19 in early 2010 – rising by 285% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

Hartford Financial’s Fundamentals in Recent Years Look Strong

Hartford Financial revenues saw a growth of 29% from $16 billion in 2015 to $20.7 billion in 2019, mainly driven by growth in the property & casualty (P&C) segment. In addition, the company’s net income improved from $1.7 billion to $2.1 billion, resulting in a strong EPS growth from $4.05 in 2015 to $5.72 in 2019. Further, the company’s Q2 2020 revenues were marginally below the year-ago period, however, the EPS figure for the quarter increased from $1.02 in Q2 2019 to $1.29 in Q2 2020.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-October 2020: Poor Q3 results and lukewarm Q4 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment

Keeping in mind the trajectory over 2009-10 and because of the improvement in Hartford Financial’s stock since late March, this suggests a potential recovery to around $57 (40% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $57 level Hartford Financial’s stock was at before the coronavirus outbreak gained global momentum.

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