12 September 2005
A couple of Cramer choices took big hits today. Are they buys now? Next up, MRH
Right after the deluge of the Gulf Coast, Cramer talked up some Katrina plays. He argued that the sell-off of insurance companies was an irrational response of the market fearing huge payouts. Cramer believed that his viewers and listeners should take advantage of this sale on insurance companies. His theory: the payouts are already accounted for in their business model and the insurance companies will be able to hike their premiums and make significantly higher profits.
Let's revisit today's Movers & Shakers section of Marketwatch.com:
Montpelier Re Holdings Ltd. (MRH: news, chart, profile) shares dropped 13.8% after the company said it estimates an impact of between $450 million and $675 million from Hurricane Katrina-related flood losses. "This is a significant net loss for us," said Anthony Taylor, the company's chairman, president and CEO, "but nevertheless it remains consistent with the nature of our business plan and our capitalization remains strong."
I read the MRH's response as fitting exactly with Cramer's theory. Cramer seems to agree, in the following excerpt from today's Real Money summary:
In response to a question about Montpelier Re (MRH:NYSE - news - research - Cramer's Take), a stock that Cramer has been bullish on and that was down more than 16% Monday, Cramer said he has looked into the situation and can find "no reason it should be down $5." He is sticking with his recommendation and thinks the stock "should be bought and bought aggressively." MRH traded at $26.09 Monday afternoon.
Before I wish that I had about five grand to pick up 200 shares, let's look at some numbers:
The IBD Ratings for MRH began the day at 18/22/C/A/E. Now, they are 18/7/C/A/D. The A grade demonstrates that MRH has a profitable business model, but the 7 score shows that the stock price is lagging significantly. Consider that MRH's market cap dropped today from $1.9B to $1.6B, leaving the stock with an 8.36 P/E and $4 below its previous 52-week low. This is prime buying territory, if the fundamentals are sound.
Sweetening the deal is the fact that MRH pays 36 cents quarterly, or $1.44 per year as a dividend. Dividing that figure into today's close of $25.99 or the after hours price of $26.30, MRH delivers a 5.5% yield, based on these purchase prices.
A quick look at the Dow Jones Property and Casualty Insurance Industry Index shows the top market cap stocks as:
BRKA - Berkshire Hathaway - 68 25 C C B 16 P/E, $107B market cap
ALL - Allstate - 79 35 C C E 11 P/E, $35.8B market cap
STA - St. Paul Travelers - 76 64 C B D- 11.5 P/E, $24.6B market cap
MLEA - Millea Holdings - 57 62 C C B+ 24.6 P/E, $24.6B market cap
PGR - Progressive - 77 55 C A B- 12.62 P/E, $19.1B market cap.
Other industry stocks with a market cap comparable to MRH ($1.6-2.0B range) include:
OCAS - Ohio Casualty Corp - 67 67 C D A- 11.23 P/E, $1.6B market cap
DHC - Danielson Holding Corp 26 82 A+ B B- 25.92 P/E, $1.8B market cap
CGI - Commerce Group - 86 30 C B C+ 7.81 P/E, $1.9B market cap
SCO - Scor Ads - 23 64 C E B- 4.98 P/E, $2.0B market cap
Out of these stocks, CGI has interesting scores; the 30 price strength lags the 86 earnings score, and the B for profitability. I'll save this stock for revisiting, but otherwise, looking at these other insurance companies, I am increasingly comfortable with MRH's P/E ratio and profitability.
I see nothing here to dissuade me from, as Cramer might put, buying MRH and buying aggressively, except for the lack of funds. I'm going to place MRH on the WershovenistPig Stock Watch List, with regrets that I cannot pull the trigger on those aforementioned 200 shares. Fooey.
Posted by WershovenistPig at 11:28 PM