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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


July 1st 2011 Travelers
NYSE Symbol: TRV
Industry: Insurance
Price as of 7/1: $59.11

An ugly month was saved by a four day, 4% rally to finish the second quarter. Amazing turnaround. One sector that did not bounce this week was the financials. Case in point, Bank of America rallied on Wednesday after settling a mortgage back security lawsuit for $8.3 billion. However, the next day the stock went back down as a number of analysts pointed out that B of A and the other big cap banks still have more litigation and mortgage related losses. The insurance stocks also had a tough quarter due to one storm after another, not including the earthquake and tsunami in Japan back in March. The recent pull back in the insurance stocks have provided a longer term buying opportunity. Our featured stock of the week is property and casualty titan, Travelers. Travelers stock was hit hard in the middle of June after preannouncing a big loss for the quarter to the tune of $1.5 billion thanks to numerous catastrophic storms. The company also halted their share buyback plan due to the quarterly loss which to me is counter intuitive. The stock is down 10% from the recent highs and may remain under pressure with the hurricane season about to kick off, but long term these issues are one time and short term concerns that do not disrupt the long term fundamentals. Investors with a long term horizon should look at Travelers if you want to exposure to the financial industry without the risk of the big multinational banks.

Back in April, everything was looking great for Travelers. Net profits for the first quarter came in at $839 million, or $1.92 a share, compared with $647 million, or $1.25 a share, in the year-ago period. Operating earnings, excluding investment gains and losses, were $1.89 a share easily beating estimates of $1.51 a share, After-tax net investment income rose 2 percent as declines in the bond portfolio were offset by the rest of the company's investments. The company, which bought back $1.1 billion in stock during the quarter, raised its quarterly dividend by 5 cents, to 41 cents per share. Travelers spent a lot of money in the first quarter partly due to a plunge of 61% in catastrophe losses totaling only $186 million. The losses that did occur came from severe U.S. winter storms. The strong earnings caused a lot of analysts to reiterate buys and raise estimates following the strong results, however as we know, the second quarter didn't go the way Travelers wanted it to go.

Before the preannouncement, Travelers was trading for 10 times 2011 earnings. Following the preannouncement of the quarterly loss, the earnings estimates were ratcheted down to $4.40 a share bumping the PE up to 13 times earnings. But these losses will not affect next years' earnings and therefore Travelers is only trading for 9.7 times 2012 earnings estimates. The stock also trades for one times sales, and one times book value. The company also provides a good dividend yield of 2.8% and goes ex-dividend again in early September. Inevitably, the insurance stocks will go through tough quarters with catastrophic events, but typically these storms are time occurrences that provide buying opportunities for long term investors.