The stock market is currently in the middle of one of the most powerful bull markets in its history, and many individual companies have been along for the ride in the past few years. American International Group, (NYSE: AIG), Berkshire Hathaway, Inc (NYSE: BRK-B), and Travelers Companies, Inc. (NYSE: TRV) are all major players in the insurance industry, and their stocks are all currently trading within 3% of multi-year highs. Is now the time for shareholders to take the money and run, or do these stocks still have legs?
The problem child
During the height of the financial crisis in 2008 and 2009, AIG was in the very eye of the storm, and it was for good reason. During the height of the housing bubble, AIG provided hundreds of billions of dollars worth of insurance to owners of sup-prime mortgage-backed securities in the form of credit default swaps. [ ]
It turns out that was not exactly the best idea, and when the housing bubble burst this happened to AIG shareholders:
It was a mistake that would have meant the end of AIG if not for the U.S. government bailout. But AIG’s core insurance business was never the problem for the company. Once the company weathered the storm surrounding its toxic assets, the stock began to recover. At its current levels, AIG is trading at its highest point since it endured its precipitous fall during the crisis in 2008. So is it time for shareholders to cash in on AIG?
Incredibly, even at a multi-year high, AIG is still trading at a 25% discount to its book value, as its P/B is currently only 0.75. According to Finviz.com, AIG is projected to have an 11% EPS growth rate over the next five years, which is enough growth to produce a current PEG of 0.84. When it comes to these metrics, the stock remains undervalued at this time.
Berkshire Hathaway is Warren Buffett’s massive international conglomerate holding company, which owns businesses devoted to railroads, energy, manufacturing, and more. However, in the first quarter of 2014, about a third of Berkshire’s earnings came from its insurance group, which includes Geico. [ ] Like AIG, Berkshire Hathaway stock is now trading at its highest level since the financial crisis, but unlike AIG, Berkshire is also now trading higher than it ever was prior to the crisis!
With Bershire Hathaway stock sitting near all-time highs, is now the time to sell?
Berkshire’s 16.3 P/E ratio and 18.3 forward P/E ratio suggest that, at this point, the stock is appropriately priced. However, it seems fitting to also look at one of Buffett’s favorite measures of stock performance: return on equity (ROE) [ ] . ROE is a measure of a company’s performance based on how efficiently it is able to generate profits from shareholders’ invested money. Berkshire’s current ROE is sitting at 9%, which is about average for the company over the past decade. Currently, Berkshire stock is hard to get excited about. But the numbers indicate the stock is far from overvalued at this point, so shareholders that have been feeling antsy about the recent rise in Berkshire’s share price to all-time highs need not be spooked.
Diamond of the Dow?
The Travelers Companies is the second largest provider of U.S. commercial property casualty insurance. After a short-lived merger with Citigroup in the late 1990’s, Travelers replaced it’s former parent company in the Dow Jones 30 in 2009, becoming the only insurer in the index at the time. Nearly 60% of Travelers insurance income in the first quarter of 2014 came from its business insurance segment, [ ]
but Travelers also has segments for auto and home property casualty insurance. Travelers stock has been on quite a tear over the past couple of years as the company has increased its net income by more than 150% from $1.4 billion in 2011 to $3.7 billion in 2013. [ ]
With the stock near all-time highs, is it time for shareholders to bail on Travelers? Despite small earnings growth projections of about 6% over the next five years, Travelers stock still appears to be relatively inexpensive, with a P/E of 8.9 and a forward P/E of 10.2. Couple those low numbers with a strong ROE of over 15%, and Travelers doesn’t yet look overpriced.
The bottom line
Stocks trading at multi-year highs can often be dangerous investments if their valuation metrics have reached unreasonable levels. After all, the adage “buy low, sell high ” is as old as the market itself. However, when large rises in share price are fueled by exceptional fundamental performances by companies such as these three insurance powerhouses, there’s nothing wrong with a little bit of “buy high, sell higher .”