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3 Reasons This Stock Has a 50% Upside

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Nobody said picking stocks is easy. Even the best investors get it wrong. I myself have bought stocks that in hindsight seemed to be poor choices. Live and learn.

In this case I am very bullish on one stock with a major upside and a 3.4% dividend yield kicker.

Industrial Alliance Insurance and Financial Services Inc (TSX:IAG) is an insurance company with home, group and auto insurance, plus a wealth management business. Revenue from group and individual insurance sales are driving cash flows. The company also “stands to benefit from its three recent U.S. acquisitions” as Karen Thomas writes.

One thing to watch closely is the sizable drop in mutual fund sales from the wealth management business. The drop in sales went from $276 million to $43 million from the first half of 2017 the same period in 2018, which is a major reason why this stock has lost its luster, dropping 25% from its high.

I’m very bullish. Here are three reasons why:

First, every time this stock trades near book value in the last 10 years, the price trend reversal has turned precipitously. The last time this book value buzzer sounded (figuratively) was early 2015. Within 12 months, the stock had climbed from $37 to $58 per share, a sizable gain.
Nearly the exact same thing happened back further in time from mid 2012 into 2013.

What was a catalyst in this previous case? You guessed. The stock price had tunneled down, this particular time dropping even below book value for a brief time at $27.21. I have every reason to believe there could be a repeat performance in 2019, as the stock is currently trading near book value estimates, which was $47.18 as of the end of Q3 this past September.

Second, every time the return on equity ticks up into the mid-teens, this stock has correspondingly moved up. This convenient metric is easy to track over time, as is the case for the price-to-earnings ratio, currently trading at a five-year low at 8.9. The stock price gains we saw 2016 was helped by a series of positive earnings reports, exceeding analyst estimates with double-digit surprises. A repeat of these good news surprises in 2019 could provide the impetus for stock gains.

Third, the company announced on November 7 that it would be buying back a large proportion of shares, to the tune of 5,482,768 common shares, or 5% of the float. Who knows a company better than its own management? It’s a wise decision to buy shares when they are cheap.

For a value investor, buying shares near book value gives confidence that if the company were to dissolve, there’s a chance you get your original investment back. (This is basically the complete opposite scenario from high flying stock names that sell for several times book value.)

Takeaway message

A balanced portfolio – particularly for young investors – should have some hyped and some anchor stocks. Industrial Alliance is the latter. Fellow Fool suggests investors should buywonderful businesses that are priced at discounts to their intrinsic value.” This happens to be the case for Industrial Alliance. Buying now therefore offers the distinct possibility of making a 50% gain.

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Fool contributor Brad Macintosh has no position in any of the stocks mentioned.

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