2 Delinquent, Undervalued Stocks in the Insurance Sector

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Made up Preferred Stock Trader

Introduction

One of the ways we identify stocks that aren’t cheap is to examine all the preferred stocks within the various credit unions to find sellers. In this case, we analyzed standard rate favorite stocks that pay “qualified” benefits from above investment companies. We believe that we have found two excellent stocks that are not needed.

Athene Holdings Preferred Stock Stock Exchange (5.9%).

Athene Holding Ltd 4.875% Series D Non-Cumulative Preferred Shares (ATH.PD)

Athene Holdings is an insurance company specializing in retirement. They provide annuities, re-insure annuities, and provide other savings products. It is owned by Apollo Global Management (APO) which is a solid “A-” rated company. Athene also has its own separate credit rating that equates to “A-” credit. Athene Preferred “D” shares, symbol ATH-Dit is one of two things chosen by Athene.

As it turns out, Athene’s preferred shares were rated two notches lower than the “A-” rated unsecured bonds, the “BBB” rating. So even Athene’s preferred stocks are high. There are only two institutions that have rated preferred stocks with higher debt than Athene at “BBB+”, just one notch above ATH-D. So ATH-D is a favorite stock. Here’s how the ATH-D stacks up against other “BBB” favorites.

Author’s photo

As we can see from the chart, only AAM-A and AAM-B have the highest yield, but AAM-A is the easy call here and trades above average. Therefore, the loss will occur on the phone and it is difficult to estimate any value from its current value. AAM-B will be called soon and only has a 0.3% gain-to-call. Again, nothing spectacular.

ATH-D, on the other hand, has a very high value at its current price of $20.64, and its recent yield is better than all remaining “BBB” stocks, even those with little or no value.

ATH-D is also relatively cheap even against its trendier sister ATH-B (ATH.PB). In general, the preferred stock with a lower price (ATH-B) has a higher yield to pay for it. But in this case, we have a natural difference. Although the most expensive price is ATH-D, ATH-D gives you more productivity than ATH-B. This is a big mistake in favor of ATH-D. It is hard to understand why investors would buy ATH-B when ATH-D is better in every way. So the foreign market prices we are seeing offer the best opportunities here.

And just to drive home ATH-D’s low-cost sentiment, we looked at some REIT-like stocks. Most are unrated but KIM-L and KIM-M are “BBB-“, one notch lower than ATH-D and Moody’s has them equal to ATH-D. The current yield on KIM’s preferred stock is about 5.2% compared to ATH-D’s 5.9%, and KIM’s preferred stock is nowhere near ATH-D’s high value as it trades around. And to make matters worse for those who like KIM, their dividends are not eligible and therefore taxed at a higher rate than ATH-D shares.

If ATH-D were to be traded at the preferred “BBB” yield, about 5.5%, it would trade at $22.25 and still be priced higher than most of its peers. Therefore, we see ATH-D’s current price to be $22.00 per share.

After the massive sell-off in fixed income we’ve seen, we’re focusing on some conservatively-picked stocks that have the potential to make more money. In each of the previous selloffs, the preferred stock returned to the division.

Ycharts

Ycharts

As seen above on the 10-year PFF price chart, each selloff has been followed by a very strong rally. Whether it was the 2013 taper tantrum, the 2016 and 2018 selloffs, or the COVID selloff, they were all followed by sharp rallies. And of course, in 2008, many preferred stocks rose 300% to 400% from their lows to recover.

In our main view, we believe that Fed hikes will damage the economy, push the US into recession and reduce consumer demand. High prices of essential goods such as food and energy are already reducing the ability of consumers to buy anything but necessities. Recently, AT&T reported that it has experienced frustration as its customers are struggling to pay their cell phone bills. Walmart also reported a bad quarter. These are bad signs for the entire economy.

When consumer demand is crushed, the supply chain should resolve itself and inflation should drop sharply. The market seems to believe in these developments as well, which is why long-term interest rates have fallen sharply in recent weeks. In the end, fierce global competition will force itself to keep prices as they have been for the past 30 years.

We believe that ATH-D can see a total return of 15% in the next 12 months and eventually return to close.

One of the reasons the ATH-D is one of the best ways to play this game is that it’s hard to crash. Instead, most of Athene’s assets are invested in high-end businesses that have been gathering. Therefore, ATH benefits from the long-term interest rate that a recession can bring.

While we often see ATH-D as a return issue (earnings plus current yield), let’s not forget that current yields are high relative to their peers and are “appropriate” for lower tax rates. Therefore, ATH-D’s after-tax yield is currently equivalent to a 6.6% bond if you are in the 24% tax bracket and a 7.2% after-tax bond if you are in the 32% tax bracket. Try to find a “BBB” bond that offers a yield of 7.2%, or a yield of 6.6%. If you do, post it in the comment section and I will be a buyer.

In order to play this upcoming conference, as well as the big returns that will come, we hope you want to be in the top names. Preferred stocks from debt-only companies or debt-free names may not participate in the event due to the increased performance and credit risk associated with the recession.

Enstar Group Preferred Stock – Yield 7.0%

Enstar Group 7.00% Series E Redeemable Perpetual Non-Cumulative Favorites (ESGRO)

Enstar Group (ESGR) is an insurance company but operates as a property/casualty insurance company specializing in aviation. That is, they take on insurance companies that want to close shop but still have policies (actions) that make it impossible to quit. ESGR assumes premiums on the remaining policy until the policy expires.

ESGR has one fixed interest rate index The value of ESGRO. Like ATH-D, ESGRO is a “qualified” payer. ESGR has a credit rating of “BBB” which means that a well-rated ESGRO has a rating of “BB+”. Below is a chart showing that ESGRO is very undervalued compared to all other “BB+” ratings.

Author's photo

Author’s photo

As you can see, ESGRO’s 7.17% yield is impressive, even compared to the second best “BB+”. And it has a yield that is 2% better than the lowest yield among “BB+” rated preferred stocks. In other words, ESGRO has a yield that is 40% better than FITBO.

In my research, ESGRO is the most underrated stock in the market based on current yield relative to its debt category. If it traded at a yield of 5.7%, which is still close to the “BB+” rating, it would sell for $31.00. Of course, because it can eventually be ordered at $25.00, it won’t sell much anymore. But it traded as high as $27.50 eight months ago before a steady market took over.

One of the best things about the price reduction is that ESGRO’s price risk should be very low compared to other preferred stocks.

When we look at the chart of the “BB+” preferred stocks, it also shows a significant downward trend in the stocks. ATH-D. Although the “BB+” preferred stock is rated two notches below ATH-D’s strongest “BBB” rating, ATH-D still has a higher yield than most “BB+” ratings. Why would you buy your favorite “BB+” stocks (except ESGRO) when you can buy ATH-D with similar or better yields, leverage, and leverage than most of your “BB+” favorites.

And to emphasize the importance of ESGRO’s reasonable payment, its yield after tax is equal to 7.9% bond if you are in the 24% tax bracket and 8.7% if you are in the 32% tax bracket.

Shutterstock

Shutterstock

Summary / Conclusion

One of the best ways to find low-cost securities is to check them in different credit unions to find the ones that sell them. Our analysis found two of the highest “qualified dividend” paying preferred stocks that are relatively cheap compared to their debt-earning peers.

“BBB” rated ATH-D is a good buy based on its recent yield and peers, and a high buy based on potential returns. We believe that the coming recession will continue to drive down long-term interest rates which could increase ATH-D’s value by 20% over time. ATH-D has a better yield than preferred stocks with credit ratings two notches below ATH-D. We have a current price of ATH-D at $22.00 and believe it will eventually sell for much more than that.

ESGRO is very cheap compared to the “BB+” rating of its peers. In fact, our work shows that it is the least important part of the market in terms of yields within its credit category. If it wasn’t listed, the fair market value was $31.00 and traded as low as $27.50 eight months ago before the stock market began to sell off.