Are you looking for a sector to invest a moderate-sized sum of money, like $2,500?
Such a sum probably won’t go all that far invested in the U.S.’s large-cap technology stocks because they’re so big already that the law of diminishing returns holds back their potential performance.
However, $2,500 invested in overlooked sectors could go quite a long way. With smaller companies in overlooked sectors, there is always the possibility of getting a “10-bagger” return, which is enough to turn $2,500 into $25,000. Now, of course, such a return is not normal or expected. But in the realm of non-mega-cap stocks, it is at least possible.
This brings us to the topic of insurance. Insurance is a very overlooked sub-sector in the already somewhat neglected financial services sector. Financials don’t get talked about nearly as much as tech despite having higher margins on average, and TSX insurers don’t get talked about as much as TSX banks do. So, there is potential here. In this article, I will explore four insurance companies that may be worth buying and holding with $2,500.
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Berkshire Hathaway
No article about insurance stocks is complete without a mention of Berkshire Hathaway (NYSE: BRK.B), the brainchild of legendary investor Warren Buffett. Berkshire is a diversified conglomerate whose wealth was ultimately built on its insurance business, which includes such names as GEICO, General Re and Berkshire Hathaway Specialty Insurance. Berkshire Hathaway is a little pricier than the average insurer, trading at around 20 times its operating profit. However, the company is also more stable than the average insurer, with better risk management. It would merit a place in a diversified $2,500 portfolio.
Fairfax
Fairfax Financial Holdings (TSX: FFH) is a Berkshire-like Canadian insurance company. It has a number of subsidiaries spread across Canada and the United States. It invests its money in a Berkshire-like way, mainly in a combination of treasuries and quality value stocks.
One thing Fairfax has that Berkshire does not is a truly cheap valuation — at least going by multiples. At today’s price, Fairfax trades at nine times earnings, 0.98 times sales, 1.43 times book value and 7.6 times operating cash flow. That’s far cheaper than Berkshire (ignoring the matter of future prospects), yet Fairfax has actually grown more than Berkshire has over the last five years. Investing a portion of your $2,500 into this stock could make some sense — there wouldn’t be much room to diversify, though, as FFH trades at $2,000.
Manulife
Manulife Financial (TSX: MFC) is a Canadian financial services company that operates primarily in insurance. It also has banking operations. The company scores well on value, growth, and profit factors. It is fairly cheap, trading at 11.7 times earnings and 1.6 times book. It grew rapidly in the trailing 12-month period (though not as much over longer-term timeframes). Finally, it is highly profitable, boasting an 18% profit margin and an 11% return on equity.
One word of caution: Manulife’s performance over the last 10 years was not as good as last year’s performance. This could indicate a stock that will become risky if macroeconomic conditions become less favourable to insurers than today’s conditions.
Sun Life Financial
Sun Life Financial (TSX: SLF) is another Canadian insurer similar to Manulife. Its big picture financial metrics are similar to Manulife’s. It’s arguably cheap, trading at about 12 times earnings. It’s growing, with earnings having compounded at 8% per year over the last five years. And it’s highly profitable, with an 11% net margin and a 16% return on equity. One difference between Sun Life and Manulife is the former’s long-term performance is not worse than the last year’s performance. In fact, SLF’s five and 10-year earnings growth rates are better than the trailing 12-month rate. So, this stock is definitely worth a look.
