AmTrust Financial Services, Inc is a multinational specialty property and casualty insurance holding company with operations in the United States, Europe and Bermuda. They principally provide workers’ compensation, commercial packages and customized property and casualty coverages for businesses, and extended warranty coverages for consumer and commercial goods.
In a show of its financial strength, AFSI recently raised its dividend by 20% to 6 cents from 5 cents. At the 6 cent per quarter rate, AFSI’s dividend yield is a money market like rate of 2.1%. While a 2% dividend might not make investors’ socks roll up and down, AmTrust’s valuations should.
The insurance broker currently trades at a forward P/E you can count on one hand: 5; while its projected 5 year earnings growth rate stands at 12%. That’s an absurd P/E-to-growth rate discount. In fact, AFSI’s trailing P/E of 8.13 is heavily discounted relative to the industry norm of 18.77. Split the difference between AFSI’s P/E and the industry average P/E and AmTrust’s stock would trade at $28.65. Considering the stock closed yesterday at $11.40, most investors would be satisfied if AmTrust were to just meet the analysts’ consensus price target of $17. We know we would be happy with a 50%-to-150% return in 12 months.
AmTrust should continue to reward investors with higher profits and possibly higher dividends as it sports a sparkling return on equity of 21.3% and an overall combined ratio of 77.3%. Now you ask, “What the hell is the combined ratio?” Good question, here’s how Investopedia defines it:
The combined ratio is A measure of profitability used by an insurance company to indicate how well it is performing in its daily operations. A ratio below 100% indicates that the company is making underwriting profit while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums.
Many insurance companies believe that this is the best way to measure the success of a company because it does not include investment income and therefore only includes profit that is earned through efficient management.
Now that you know what combined ratio means, aren’t you happy to know AFSI’s is under 100%? Makes you feel a little better, doesn’t it? We expect AFSI will continue to make investors feel better as we believe the stock will outperform the market over the next 6-to-12 months.
Once again we find Coal at the bottom of the stack in this week’s sector performance update. With Cap & Trade passing the house and the Senate sure to pass something too, Coal should make itself comfortable down there. After all, President Obama himself said his Cap & Trade policy would necessarily bankrupt coal companies and drive utility bills up. Much like Europe has tried to do, unsuccessfully, this administration is hell bent on driving the cost of fossil fuels up so that windmills, solar panels and whatever riles the imagination will be almost as cost effective as our current energy infrastructure. We just hope they put those Obama stimulus stickers on everybody’s energy bill so Americans know who is to blame when the cost of cap & trade hits your mailbox.
Here are the past week’s top and worst performing sectors:
Performance versus the S&P 500
Rank
Industry
% Return +/- the S&P
% up/down
1
NONFOOD RETAIL-WHOLESALE
5.15%
4.88 %
2
CONS PROD-MISC STAPLES
4.84%
4.58%
3
DRUGS
4.80%
4.54%
4
POLLUTION CONTROL
3.96%
3.70%
5
TELECOMMUNICATIONS SERVICES
3.41%
3.15%
6
COMPUTER SOFTWARE-SERVICES
2.94%
2.68%
Here are the week’s poorest performing industries:
Performance versus the S&P 500
Rank
Industry
% Return +/- the S&P
% up/down
59 of 59
COAL
-2.52%
-2.77%
58
AEROSPACE-DEFENSE
-2.17%
-2.41%
57
OIL-EXPLORATION&PRODUCTION
-1.83%
-2.08%
56
OIL MACHINERY-SERVICES-DRILLING
-1.62%
-1.87%
55
MEDIA
-1.44%
-1.69%
54
OIL-INTEGRATED
-0.88%
-1.13%
This week our technical analysis of industry stock charts only managed to find 1 new buy signal, Personal Products Stocks, and 1 new sell signal, Footwear Stocks.
For whatever the reason, the indexes like heading up during holiday shortened trading weeks. As we head into the July 4th weekend, we have a holiday shortened week. So we expect the indexes will finish higher by Thursday afternoon’s final bell.
All our indicators are pointing in that direction too as we saw our momentum score gain some strength late in the week. Our trend analysis saw the NASDAQ, S&P 500 and the Dow Jones Industrials all break sharply higher off of support levels. Finally, our market leadership model finds itself in bull territory for the 6th straight week.
Add in the NASDAQ’s off the chart volume on Friday, and we have reasons to be hopeful that this will be a money making week. The index traded 3.6 billion shares on an up day as it bounced off support. This should provide for a strong level of support in the 1875 range. Unfortunately, the S&P 500 and the Dow Jones didn’t join the NASDAQ’s volume party.
Investors might wish to consider a NASDAQ based ETF like PowerShares QQQ (QQQQ) of for double the fun Ultra QQQ ProShares (QLD) as a potential way to profit if we have made The Correct Call .
Speaking of profits, readers of the Correct Call Calendar that took advantage of one of last week’s Stock of the Week picks, NovaMed Inc. (NOVA), made out like bandits. NOVA was UP 22.5% in a week. NOVA wasn’t the only stellar performer for our readers. The Correct Call Calendar users saw ISTA move UP23.7% since June 17th and last week’s Trading Earnings picks CRMT & APOG made 18% and 11.6% respectively after reporting earnings last week.
Lindsay Corporation (LNN) is set to report earnings before the market opens on Wednesday, July 1st . Interested investors may participate in the call by dialing (888) 748–0479 domestically, or (706) 758-9823 internationally and referring to conference ID # 15069814. Lindsay manufactures and markets irrigation equipment primarily used in agricultural markets which increase or stabilize crop production while conserving water, energy and labor. The Company also manufactures and markets infrastructure and road safety products through its wholly owned subsidiaries, Barrier Systems Inc. and Snoline S.P.A.
LNN is expected to earn 25 cents for its 3rd quarter. We expect the Farm & Construction Machinery company to announce earnings that will miss investors’ and analysts’ expectations. There have been some major recent downward revisions to LNN’s earnings expectations.
The downward revisions are the result of delay of an anticipated project in Mexico City. On May 26th, Lindsay announced:
the $19.6 million Mexico City moveable barrier project continues to be delayed pending resolution of issues between the contractor and the local government. At this point, the Company cannot estimate when or if the issues between the contractor and the local government will be resolved or whether the Company, through its wholly-owned subsidiary, Barrier Systems Sales & Service, LLC, will recognize revenue on this project in fiscal 2009.
Surprisingly, only 1 of the 6 analysts following LNN has lowered his outlook for this quarter and the rest of 2009. That probably leaves a lot of older and much higher estimates in the consensus. This is a recipe for a big miss.
And Lindsay has a history of missing. They have missed their quarterly earnings forecasts 3 of the last 4 quarters. Twice the stock has dropped by more than 20%. In our view, LNN has room to move down yet again.
At $32 and change, its stock is a bit pricey trading with a forward P/E of 27.64. Yet, in the company’s press release they admit a great deal of uncertainty as to how the Mexico City project will impact its bottom line. We can see downward revisions on the horizon after management gives their forward looking guidance on the conference call.
The forward P/E is based on 15% projected earnings growth for 2010. We think that’s already way too big of a premium P/E for LNNs anticipated growth. Any downward revision would only widen that divide.
Looking at LNN’s stock chart, our technical analysis sees a downward trend that could push the stock to the $27.50 range on disappointing earnings or guidance. We also see nearly double the open interest in LNN’s July 30 put option relative to the July 35 call option. This means speculators and hedgers are joining us on the bearish side of the scale.
Investors might consider the July 30 or 35 put options as a way to take advantage of LNN’s fall if we have made The Correct Call. Just remember, with options, if the stock moves against you, it’s possible to lose 100% of your investment.
Many of the Japanese ETF charts we mentioned in last week’s ETF Screener look even healthier this week. Two new Japanese ETFs joined the party this week as ETFs that could outperform the S&P 500 in the near-to-intermediate term.
iShares MSCI Japan Index (EWJ)
SPDR Russell/Nomura PRIME Japan (JPP)
Japan isn’t alone on the international front. Many high yielding international ETFs and one currency ETF, iPath GBP/USD Exchange Rate ETN (GBB), popped off the charts in this week’s ETF screener. Investors will be rewarded with rich dividends while invested in these international ETFs that flashed technical analysis buy signals.
WisdomTree Europe Total Dividend (DEB) 6.63%
WisdomTree International LargeCap Div (DOL) 6.16%
WisdomTree DEFA Equity Income (DTH) 8.45%
WisdomTree International Communications (DGG) 5.79%
Back on the home front, 2 healthcare ETFs and a patent based ETF posted the only new technical analysis buy signals.
iShares Dow Jones US Medical Devices (IHI)
Ultra Health Care ProShares (RXL)
Claymore/Ocean Tomo Patent (OTP)
Before we list the ETFs that posted sell signals, we think it’s important to note that many energy ETFs look ready to rollover. While not 1 crossed the line into underperformance territory, almost all of them have one foot right on the line. If oil falls much more – say $65 a barrel – we would expect next week’s ETF screener to be full of energy ETFs on the sell side.
Another day another trading earnings pick up nearly 10% in a day. Our Correct Call Calendar readers were alerted to Apogee Enterprises Inc. APOG as a candidate to POP on earnings. Meanwhile, CRMT has tacked another 6% today. Don’t miss next week’s trading earnings picks.
We found two companies with insider buying that Wall Street is virtually giving away, an insurance company and a small regional bank. Our Correct Call Calendar readers will find the bank story in today’s calendar.
American Equity Investment Life Holding Co. (AEL) engages in the development and sale of annuities and life insurance products in the United States and the District of Columbia. The company underwrites annuity and insurance products, as well as collects renewal premiums on certain accident and health insurance policies.
Since March, 2 insiders have purchased 18,000 shares totaling $74,000. That doesn’t sound like much, but considering the C.E.O., Wendy Carlson, bucked up almost 20% of her salary, that says something. The fact that no insider has sold any stock in the last 6 months says something too.
AEL has been as high as $11.40 in the last year and closed trading last night at $5.21. AEL’s book value of $10 is much closer to its 52 week high than its current target price of $8. If American Equity were to trade up to its analysts’ consensus target price, investors would make 54%. Though we would prefer investors get the 92% if AEL can make it to its book value per share.
Based on AEL’s valuations, we can’t help but imaging this stock will be higher than $5.21 in the next 3-to-6 months. At $5.21, the insurance company trades at a forward P/E of just 3.21. That’s a bankruptcy or depression P/E. You think the C.E.O. would chalk up $50K if she were headed for the street? Throw in its PEG ratio of just .41 (remember the lower the better) and price to sales of .6 and you can see why we think AEL will reward Ms. Carlson and investors.
Suggested Closing Price Stop: $4.48
Our Calendar readers will find what we believe is the stronger of the two insider buyingstocks in today’s Correct Call Calendar.
It could be Oh Lord for investors again if oil takes another big hit. If you recall, when oil’s price fell from $140 so did the stock market. They both fell like the guy in the Hangover video. We are not interested in seeing that movie again (haven’t seen Hangover yet, but all our friends who have say it’s funny as hell).
On the top end of the sector performance grid, we find all things healthcare. Clearly healthcare will be in the news for some time to come as Democrats plan on pushing through a healthcare bill be it with or without support. In this same sector performance column in late May, we wrote that Healthcare Stocks and Medical Equipment Stocks had just posted new technical analysis buy signals.
We are in for an interesting ride to start the week as futures are pointing a possible sharp decline to kick off the first week of summer. The decline is a result of The World Bank cutting its global economic forecast from -1.7 to -2.9% for the rest of 2009. Although the report says a recovery should start late in 2009, it warns:
Economic damage to developing countries “has been much deeper and broader than previous crises” and “the expected recovery is projected to be much less vigorous than normal,” the report said. It said banks’ ability to finance investment and consumer spending would be hampered by the overhang of unpaid loans and devalued assets.
In other words, people can’t use their homes and portfolios as ATMs any longer. That extra octane for the consumer and economy is gone for a long time to come.
The Correct Call was waiting on the market’s next move. Although all of our indicators are slightly in the green, we could see clearly that all the indexes had flattened out. And what makes the flattening even more interesting or worrisome for investors is that it occurred on support levels. That means the next move could be sharp.
Last week we wrote as long as the Dow Jones stays close to 8500 we should be ok. With the Dow closing last week at 8539, we don’t have too much room for error. If the indexes should fall through these levels of support they should find their footing again fairly quickly.
The Dow Jones Industrials should find friends in the 8300 range, the NASDAQ between 1730 and 1750 and the S&P 500 should regain its balance in the 860 to 890 range.
In today’s Correct Call Calendar, our readers will find 2 trading earnings picks and 2 selections for the stock of the week.
