Shares of insurance company Allstate are up nearly 4% in 2021.
Q3 stats announced in early November missed estimates.
Long-term investors might want to consider buying the dips in ALL stocks, especially if they fall below $110.
Non-life and non-life insurer shares Allstate (NYSE:) are up about 3.8% so far. In comparison, the returned almost 26%. Meanwhile, another insurance heavyweight's stock is up 41% so far in 2021.
The year started off with an upward trend for Allstate, although returns softened as 2021 drew to a close. On May 26, after robust Q1 results, ALL stocks hit $140.00, a record high. Then came short-term profit-taking, followed by another multi-month high, pushing the stock back to nearly $140.
But since then, the stock has lost about 18.5%. It is currently hovering around $114. The current price supports a dividend yield of 2.84%. The stock's 52-week range was $102.55 – $140.00 while its market capitalization (cap) stands at $32.7 billion.
The US auto insurance market is worth more than $310 billion. Allstate is among the five leading names in terms of market share. Likewise, it is one of the top names in the property and casualty insurance segment.
On Nov. 3, Allstate released third-quarter financial data that raised eyebrows. Revenue of $12.48 billion represented a 16.9% year-over-year (YOY) increase. But adjusted net income per diluted share lagged significantly: 73 cents versus the $2.87 level in the third quarter of 2020. The significant decline primarily reflected higher levels of non-catastrophe losses in auto and homeowners insurance.
CEO Tom Wilson said after the earnings release:
“Automotive insurance had an underwriting loss in the quarter as supply chain disruptions led to rapid price increases for used cars and original equipment parts… In addition to offsetting short-term volatility, our ongoing strategic initiatives have increased value on the increased in the long term."
Despite management's positive sentiment, investors were unimpressed. Prior to the release of the quarterly results, ALL stocks were trading around $125. Then, on December 9, it hit an intraday low of $106.11. And on December 24, it closed at $114.13. Allstate stocks have a "neutral" rating.
Chart: Investing.com
Analysts have a median 12-month price target of $129.46 for the stock, up more than 13% from current levels. The 12 month price range is currently between $105 and $176.
Graph: InvestingPro
Similarly, according to a number of valuation models, such as those considering P/E, P/B or P/S multiples or DuPont analyses, the average fair value for ALL stocks, through InvestingPro, is $141 .46, implying an upside potential of almost 24%.
In addition, we can look at the financial health of the company determined by ranking more than 100 factors relative to peers in the financial sector. In terms of relative value and earnings health, Allstate scores 4 out of 5 (top score). Overall performance is rated "great".
Trailing P/E, P/B and P/S ratios for ALL stocks are 5.1x, 1.3x and 0.6x. In comparison, those metrics for peers are 9.6x, 0.9x, and 1.1x. In other words, ALL stocks offer potential value at current levels.
Finally, those who watch technical charts may be interested to know that several long-term indicators of ALL point to oversold levels, and that the decline may have run its course since August.
In the coming weeks, we expect Allstate stocks to potentially trade in a range between $110 and $120, providing a base from which a new leg can begin. Equities to Portfolios
Allstate bulls with a two- to three-year horizon who are not concerned about short-term volatility may want to consider buying the equities around these levels for long-term portfolios. The target would be $141.46, the fair value implied by various models.
Alternatively, investors might consider buying an exchange traded fund (ETF) that owns ALL stocks. Examples include: the Invesco KBW Property & Casualty Insurance ETF (NASDAQ:), the iShares US Insurance ETF (NYSE:), and the Siren DIVCON Dividend Defender ETF (NYSE:).
Finally, those who have experience with options strategies and believe that ALL stocks can fall further may prefer to do a bear put spread.
Most option strategies are not suitable for most retail investors. Therefore, the following discussion is provided for educational purposes and not as an actual strategy to be followed by the average retail investor. If you believe ALL stocks could continue to hit new highs in the coming weeks, consider selling a cash-backed put option in Allstate stock — a strategy we cover regularly. Because it concerns options, this setup is not suitable for all investors.
Let's assume an investor wants to buy Allstate stock, but not pay full price, currently $114.13 per share. Instead, the investor would prefer to buy the shares at a discount in the coming months.
One option would be to wait for ALL stocks to fall, which may or may not be. The other option is to sell one contract of a cash-backed Allstate put option.
So the trader would normally write an at-the-money (ATM) or an out-of-the-money (OTM) put option while simultaneously setting aside enough money to buy 100 shares of the stock.
Let's assume the trader executes this trade until the option's expiration of February 18, 2022. Since the stock is $114.13, an OTM put option would have a strike of $110.
Thus, the seller would have to buy 100 shares of ALL at the strike of $110.00 if the buyer of the option were to exercise the option to allocate it to the seller.
The ALL 18 Feb. 2022 110.00 strike put option is currently offered at a price (or premium) of $2.63.
An option buyer would have to pay $2.63 X 100, or $263, in premium to the option seller. This premium amount belongs to the option seller, no matter what happens in the future. The put option will stop trading on Friday, February 18.
The seller's max profit is this premium amount if ALL stocks close above the strike price of $110.00. If that happens, the option will expire worthless.
If the put option is 'in the money' (meaning the market price of ALL stocks is less than the strike price of $110.00) before or upon expiration on February 18, this put option can be assigned. The seller would then be required to purchase 100 shares of ALL stock at the put option's strike price of $110.00 (i.e. $11,000 in total).
The breakeven point for our example is the strike price ($110.00) minus the option premium received ($2.63), i.e. $107.37. This is the price at which the seller would lose money.
Cash-secured put selling is a fairly more conservative strategy than buying a company's stock at the current market price. This can be a way to take advantage of any hitches in ALL stocks in the coming weeks as you build a stock base.
Investors who end up owning ALL shares as a result of selling puts may further consider setting up covered calls to increase the potential return on their shares. Thus, selling cash-backed puts could be considered the first step in owning stock.
