According to Bank of America analysts, the stocks, which are all insurance companies, have an estimated 38 percent return potential.
“UK insurance has delivered a total return of around 7% YTD [year to date], which would be pleasing in normal times. However, in these unusual times, UK insurers have underperformed both the FTSE All-Share [index] and UK banks, which is not a common occurrence,” analysts led by Andrew Sinclair wrote in a July 20 note.
“We see several high-quality names with reopening exposure at absurdly low valuations,” they add.
The insurance industry suffered as a result of claims for business losses caused by the coronavirus pandemic. Natural disasters and Brexit also had an impact, with insurance syndicate Lloyd’s of London reporting a $1.24 billion pre-tax loss last year. However, according to BofA, the majority of Covid-related claims have now been filed, while home insurance companies have benefited from a “favorable claims mix,” with fewer claims for theft, for example.
The bank’s top stock picks are Legal & General and Beazley, both of which it believes have “potential for growth.”
Opportune surprise.” Legal & General is forecasting a 7.3 percent dividend yield this year, with the bank expecting it to grow at a 5 percent annual rate. “This is an exceptionally appealing entry point for a high-quality name,” the analysts said, referring to the stock as a “reopening winner left behind.” The stock is rated a buy by BofA, and the company reports its results on August 4.
Aviva, Direct Line, and Quilter are among the other stocks that have been rated as buys. Aviva’s dividend yield in 2021 is estimated by BofA to be 5.9 percent, with the company reporting earnings on August 12, while Direct Line’s dividend yield is 9.6 percent (reporting August 3). Quilter, a wealth manager, forecasted a 3.6 percent yield — the company reports earnings on August 11.
Lancashire (earnings due July 28) and life insurer Phoenix are also buy-rated by the bank (reporting August 11). “We believe the stock looks mispriced at this point in the pricing cycle, but we believe shares will struggle to outperform in the third quarter / US hurricane season,” it said of Lancashire.
The 10-year Treasury yield fell to a five-month low on Monday, alarming some equity investors about the possibility of an economic slowdown due to the spread of Covid variants. The benchmark yield has remained stable at around 1.25 percent. Nonetheless, Wells Fargo Securities advised investors to take advantage of low interest rates.
“Investors should not interpret these low rates as a signal that economic growth is meaningfully impaired and that it is time to seek refuge in the work-from-home bunker,” Wells Fargo Securities senior equity analyst Christopher Harvey wrote in a note to clients.
For the second half of 2021, the firm favors stocks and strategies “that can capitalize on an artificially low cost of capital,” which includes increased exposure to buybacks, mergers and acquisitions, real estate investment trusts, and some housing, according to Harvey.
According to the firm, the “obvious” solution for corporations is to issue debt and repurchase shares or other firms.
“For portfolio managers, we see a few options, almost all of which are related to leverage and/or low funding costs: “Increase your exposure to companies that are buying back shares, broker-dealer or M&A candidates, REITs, and, to a lesser extent, housing,” Harvey said.
To capitalize on the buyback theme, Wells Fargo Securities screened for stocks that are benefiting from buybacks in a low-interest-rate environment. Many of the companies pass the risk parameters set by Wells Fargo Securities and have a reasonable exposure to the reopening.
“Finally, and most importantly, we would expect these firms to perform better in a down tape than many other stocks because buyback executions frequently accelerate during sell-offs,” Harvey added.
Wells Fargo Securities rates all of the listed stocks as overweight.
Yum! Brands, Starbucks, and Ralph Lauren are among the consumer discretionary names on the list. Yum! Brands approved a new $2 billion buyback plan in May that will run through December 2022.
Marathon Oil and Valero Energy are among the energy companies on the list.
The financials that make the buyback screen are PNC Financial, Bank of America, and US Bancorp. PNC Financial announced a 9% dividend increase and a $2.9 billion stock buyback program last month.
Meanwhile, Bank of America announced in April a $25 billion stock repurchase program that would be phased in over time.
Wells Fargo Securities also named Norfolk Southern, Applied Materials, DuPont de Nemours, LyondellBasell Industries, and Celanese to its list.