Wednesday, September 1, 2010

A Contrarian Hurricane Earl Trade: Allstate Insurance (ALL)

The stock is trading up a dime at $27.70.
This piece came out on August 3, 2010. In the meantime the stock has done nothing but ooze lower, so we decided to sit on the link.
Now, with Earl rumbling up the east coast it might be time for a trade. Here's the Aug. 1-to-date chart from BigCharts:

From Barron;s Hot Research, August 3, 2010: 
Hold On to Allstate's Good Hands 
Credit Suisse sees three catalysts despite a weak second quarter for the insurer.
Allstate (ALL: NYSE)
By Credit Suisse ($28.24, Aug. 3, 2010)
WE RECOMMEND INVESTING in Allstate (ticker: ALL) despite weak second-quarter earnings (high catastrophe losses and continued negative policy in force (PIF) growth) as we believe three catalysts should get this stock working: 1) seasonal hurricane trade; 2) PIF improvement; 3) buyback announcement.
[We rate Allstate at Outperform with a $41 price target.]
Seasonal hurricane trade: Over the last 16 years, the stock gained 4% on average in September and another 2% in October, generating an 8% return in the last four months of the year, in addition to a 2% annualized dividend yield.
The stock is pricing in a severe hurricane season since this year is forecast to be the second-worst year for hurricanes -- anything less should be a positive catalyst for the stock. Investors may start buying Allstate starting the first week of September, if hurricane activity in August is normal.
Downside in a bad hurricane season is 3% of second-quarter 2010 estimated book value per share.
Allstate reduced homeowners' market-share exposure to hurricane-exposed states in the Gulf coast by 22% and in the Southeast U.S. by 7% since 2005.
Policy growth: Allstate's personal auto PIF declined low single digits since 2008 as customers shopped for cheaper polices during the recession and the company raised pricing significantly last year. Historically, there is a three- to four-quarter lag between when approved rate increases peak, and when PIF growth improves. Year-over-year personal auto pricing peaked in the fourth quarter of last year at 4.6% and should be low single digits this year. Accordingly, we expect quarter-over-quarter improvement in personal auto PIF declines starting fourth quarter of this year/first quarter of next year.
Resumption of buyback: We expect Standard & Poor's to remove its negative outlook on the ratings during its annual review, which usually occurs end of September/early October. Based on our analysis of the company's capital position, we believe the company can announce a buyback for the first time in two years, in the first quarter of next year (even if we have a bad hurricane season), which should provide greater confidence to investors that the capital position is solid. Should the hurricane season be normal, the buyback announcement could occur in the fourth quarter of this year.
-- Vinay Misquith
-- Max Zormelo
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