Some stocks outperform simply because they have the wind at their backs. These so-called momentum stocks outperform the average market because positive sentiment and surging market values create a virtuous cycle of wealth creation.
One such momentum stock seems to have emerged in just the last few months. Quebec-based IA Financial (TSX: IAG) has seen its stock price appreciate by a jaw-dropping 74% since Christmas 2019. Now the stock is trading at an all-time high and seems to still have plenty of room for further gains in 2020.
Here’s a closer look.
Massive potential
IA seems to be one of the smaller players in Canada’s largest industry: finance. The company provides health and life insurance as well as some wealth management and mutual fund services. It’s a small financial conglomerate with impressive margins and a long track record.
My Fool colleague Joey Frenette says an “aura of conservative practices” protects the company from the downside risks of bad underwriting practices and the business cycle. Management seems keen on being more risk averse than its rivals and diversifying the business to protect its earning power.
The company is only a fraction of the size of larger rivals such as Manulife (market cap: $47.42 billion) or Sun Life (market cap: $34.33 billion), which means it has plenty of opportunity to seize market share and expand its top line while maintaining similar levels of profitability.
However, the market potential and boring business model isn’t the reason the stock has been surging recently. Instead, it seems investors have finally realized just how underpriced the stock was.
Unbelievable valuation
IA’s fundamentals seem to have outpaced its valuation in recent years. The company’s sales grew to $13.75 billion over the past year, while its market capitalization was less than half that amount for much of 2019. In other words, the stock’s price-to-sales ratio was under 0.5 — a clear indication of undervaluation.
Despite the recent surge, the stock still seems undervalued. It’s currently trading at a price-to-earnings ratio of 11.86 and a price-to-book ratio of 1.43.
The valuation seems even more attractive when you consider the stock’s dividend history and outlook. IA’s management team has hiked dividends for six consecutive years. Despite this, the dividend-payout ratio remains conservatively low at just 28%. A low payout ratio coupled with an expanding business means investors can expect a steady rise in dividends going forward.
IA has the potential to become one of the best dividend-growth stocks in the country, which, in my opinion, entitles it to a better valuation. Investors should add this to their dividend-growth watch list in 2020.
Bottom line
IA Financial’s conservative strategy has made it one of the best-performing insurance companies in the country. However, the stock price failed to reflect the underlying business’s strength until very recently. The stock is now up 74% and is still a long way away from its true intrinsic value. IA is still trading at low multiples.
If the stock’s momentum carries on unabated, investors could expect substantial gains throughout 2020. Long-term investors should add this to their watch list.
