The Hartford Financial Services Group (HIG) has outperformed its main peers this year – gaining nearly 58 percent to close at $35.42 Tuesday.
In comparison, Selective Insurance Group (SIGI) gained 41 percent and American Financial Group (AFG) gained 45 percent. But despite this relative outperformance, Tradespoon’s algorithmic indicators continue to favor HIG for further gains. Specifically, over the next two months, we expect HIG to retake the $36 per share handle and stay there – a share price increase of 2 percent.
Over the past 30 days, Hartford has traded in a range between $33.04 and $36.20, before sliding off that level in the past few sessions. On a longer-term chart, HIG shows support around $29. In addition, the 50-day Moving Average – below price at $34.45 – and the 200-day Moving Average – below price at $31.85 – should provide additional levels of support.
As can be seen from the graph below, HIG gained from November 2012 until the end of May 2013 before trading in a very narrow channel until the beginning of October. The breakout of that channel to new short-term highs above $36 is an impetus to go long the stock.
FUNDAMENTAL OUTLOOK
HIG’s short-term bullish technical indicators are supported by strong fundamentals, as well. Despite reporting a third quarter profit of $0.65 per share, Hartford’s trailing 12-month P/E ratio is negative. Though, using just the prior three fiscal quarters, HIG’s P/E is 29.53 – above both the industry average of 12.08 and the S&P 500 average of 18.85.
HIG forecasted EPS for the Q4 are between $0.87 and $0.94 per share, compared to a $0.13 loss for the fourth quarter of 2012. The financial strength of the company is at satisfactory levels, which is further confirmed by the rating agencies. Namely, Hartford Fire Insurance are on stable outlook and are rated A+ by Fitch; Hartford Life Insurance Company, Hartford Life and Accident Insurance Company, and Hartford Life and Annuity Insurance Company are all at stable outlook and have A- rating by Fitch.
Hartford’s head to head comparison to its main competitors show that the company has lowest gross margin, which is also lower than the industry average; moreover, the company’s operating margin is also lowest when compared to the competition, and much lower than the average for the industry. Hartford also has a better long-term debt situation than many of its peers. The long-term debt to equity ratio of 33.75 is at better levels than the industry average of 53.94. The interest coverage ratio of 7.49 is at slightly worse levels than the average for the industry of 8.19, but it is still at very satisfactory levels.
Moreover, HIG is currently trading below its intrinsic value of $38.64, suggesting that the stock remains undervalued at these levels.
DEBIT CALL RECOMMENDATION
As mentioned, over the past month, we believe HIG could rise past $36 per share, providing stock traders with a 2 percent upside. However, for options traders, buying the January 2014 $35 calls and selling the $36 calls for a net debit of $0.50 could provide a much more favorable risk/reward setup. In that instance, if HIG trades above $36 at January expiration, the spread will be worth $1 – giving a 100 percent return. The maximum loss is the price of the spread, or $0.50 per share.
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