2 weeks Ago By [email protected] (Ryan Vanzo)
If you're looking for a stock that can protect your portfolio during a downturn but still beat the market in the long term, look no further than Chubb ( CB 1.17% ) . The more you dig into this company, the more there is to love.
Few businesses can match Chubb's multi-decade stability. And there's a famous investor who just bet billions on its stock. Warren Buffett loves this stock It's wise to pay close attention to which stocks Warren Buffett is buying.
Last last year, the Securities and Exchange Commission (SEC) granted Buffett an exemption to its disclosure rules, allowing his holding company to acquire a large stake in a financial company without tipping the market off to the specific company in question. A few months ago, it was revealed that the business was none other than Chubb, the largest publicly traded property and casualty insurance provider in the world. Right now, Buffett's stake is worth around $7 billion.
It's easy to see why Buffett likes this company so much. Berkshire Hathaway , Buffett's holding company, owns several large insurance operations. These insurers write a bunch of policies, earning policy premiums in return.
Because premiums are paid up front, with this capital only paid out later in the event of a claim, the insurance business essentially gets to keep the capital for months or years at zero interest. This "free" capital is called float. Buffett has made a career out of investing this float into high-performing investments.
Not only is the capital interest free, it's also available regardless of market conditions, allowing Buffett to make new investments even as capital dries up elsewhere. In this regard, Chubb fits into Berkshire's current business model very well. But there's another reason Buffett likely made the move: The next few years could prove very profitable for insurance operators like Chubb.
Research from the Swiss Re Group suggests that pricing and profitability are set to improve with lessening competition, higher interest rates, and easing inflation. "Property and casualty insurers are expected to improve profitability in 2024, with industrywide return on equity (ROE) across eight major markets at 10% so far this year, up from 6% in 2023," the firm's research predicts. "ROE of above 10% is forecast into 2025.
" As you can see, Chubb's return on equity figures have already improved immensely over the last few years as market conditions have improved. The share price has risen dramatically as a result, with the price-to-book ratio now hovering near multi-year highs. But as Buffett is signaling, now is not the time to back off.
In fact, it's time to double down on Chubb stock. CB Price to Book Value data by YCharts. It's time to double down on Chubb stock While Chubb's price-to-book ratio may look inflated, there are two things to note.
First, the company has repurchased a ton of shares recently. In 2016, Chubb had around 473 million shares outstanding on a fully diluted basis. Today, it has only 408 million -- a 14% reduction.
And the company still has more than $3 billion remaining under its authorized share repurchase program. Counterintuitively, buying back stock actually tends to depress accounting book value, even though this action often ends up boosting per share value over the long term. The end result is that Chubb's relatively high price-to-book ratio isn't as inflated as it seems.
Second, Chubb stock has a history of performing well during both bull and bear markets. Market volatility indexes spiked last month, as did many recession indicator metrics. While predicting where the market will head next is extremely difficult if not impossible, your portfolio could still benefit from adding resilient, high-quality companies that can outperform the market regardless of market conditions.
During the 2008 financial crash, for instance, Chubb stock outperformed the S&P 500 even during the lowest point of the crisis. And in the following decade, Chubb stock beat the S&P 500 again, this time by double digits. Chubb's ability to perform in both bull and bear markets is no wonder.
It runs a conservative approach to capital allocation, giving it the ability to expand and acquire competitors during down markets. This combination reduces downside when pricing or volumes dip, yet gives the company a boost for when conditions shift. Right now, Chubb stock trades at 1.
8 times book value, a discount to the industry average of 2.3 times book value. That's despite Chubb's superior returns on equity and depressed book value.
Regardless of your view on the market, now looks like a great time to double down on Chubb stock..
