The Canadian financial stocks have really been making up for lost time over the past year or so. And while it seems like prime time to take a bit of profit off the table now that they’re coming in hot during the scariest time of the year – or, at the very least, a more volatile ride than the summer months – I do think that the insurers could continue to reward their shareholders with continued capital gains alongside more dividend hikes.
To put it simply, the big insurers are heating up, and with so much strength across the board, perhaps it’s not all too bad an idea for value investors to be buyers of strength.
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The insurance stocks are getting overheated, but they’re far from expensive
Sure, buying high and selling higher is typically how value investors place bets. But given price-to-earnings (P/E) ratios aren’t exactly what you’d consider overextended (actually, they still look too low given their newfound strength), I think hanging on for the ride higher could be a profitable strategy. Of course, the tides could turn on a dime, especially if Canada’s economy starts to feel more of that tariff hit.
Either way, I think it’s full speed ahead for the insurers. And while the stakes are higher, I’d also argue that the fundamentals are improving at such a pace that shares of a well-run insurance firm may stand to get cheaper as they move higher, even though they look pricier based on traditional valuation metrics.
Though time will tell, I do think the insurance stocks aren’t finished rallying, especially as they continue posting great results in a market environment that’s robust, but certainly not free from worry.
Great-West Lifeco
First up, we have Great-West Lifeco (TSX: GWO), a highly underrated insurance play that I’ve encouraged value seekers to check out when the dividend yield was still swollen and above 5%. Nowadays, shares have gained enough that the yield is at 4.4%.
Now up over 41% in two years, GWO stock is as hot as many Canadian tech plays. Indeed, the growth spurt is pretty unexpected for an insurer and wealth manager that went sideways for nearly a decade before its big 2023 breakout.
Personally, I think the multi-year bull run has legs, as the firm continues posting strength across the board while unlocking operational efficiencies left and right. Of course, the current environment, which bodes well for insurers, is a huge help. However, the firm’s underwriting track record is helping Great-West really pull ahead of the pack. I think its solid underwriting is its main source of a moat.
While the latest (second) quarter saw robust growth, I do think that the U.S. retirement business needs to get on track if GWO shares are to continue this pace. Of course, another 40% or so in returns in two years seems mostly out of the question. Either way, the firm has proven itself as a high-level operator and one that’s worthy of a multiple far higher than 13.7 times trailing price-to-earnings (P/E).
