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In tough markets, it should come as no surprise that investors flock to quality names that provide safety.

And this week’s Stock of the Week does exactly that.

It’s a household name in the insurance industry and has consistently outperformed the markets over the last five years.

But in 2021, as investors sought high-growth stocks and sectors like tech took off, this stock fell behind.

That means it has plenty of room to run… and I’ve got the proof.

You can check out my latest Stock of the Week video by clicking on the image below.

Plus, I share four possible scenarios for where the market could be headed after the week we’ve had.

And I’ll explain what will be the most important investing strategy of the year.

Check it all out below.

And don’t forget to send me stocks you’d like me to analyze in these videos. Send your tickers to mailbag@manwardpress.com.

Transcript

Hi, everyone, and welcome to another Stock of the Week… And what a tumultuous week in the markets, though I’ll get to that in a second.

So how could anybody possibly have any stocks of the week? Well, let me just highlight one and see if you like the reasoning behind it. I’ll also give you an insight into how I look at the markets and how I look at individual stocks, because we’re always going to have turbulent times in the market.

So this stock in question, a company called Progressive Corp. (PGR), it’s an insurance company, it’s operating in the non-life insurance segment, so it’s got everything from residential – which means homes, condos, manufactured homes – it caters to them, as well as insurance in autos, vans, pickup trucks, dump trucks and the like. Now, insurance at difficult economic times or uncertain market times can be often a flight to a quality segment of the market.

They currently have got a market cap of $56 billion, and I do want some of that sizable safety when the markets are like this. Okay, so it fits in for what I’m looking for in terms of the sort of broad background and story, but more important than that are of course the financials. If you know about how I like to pick stocks, and you know my background in the hedge fund industry… you know my background with all the books over my shoulder that I’ve written for the Financial Times… then you know I’m very thorough, I’m very diligent, and it’s the numbers, not the story, that are important to me. So let’s look at some of those numbers.

Now, in my own algorithm, which measures valuation of a company based on its profitability… and at the moment, there’s a lot of talk about, “We want companies which are undervalued. We want companies which are not overvalued…” So this factor is particularly important. It also measures revenue growth because, of course, I do want a company to be growing. I certainly don’t want an undervalued company because it’s not growing and that’s why nobody wants to buy its shares. That’s the wrong kind of undervalued company. My job, through my GVI research service, is to make sure that I find the right type of undervalued company for you. And then those other factors of income and cash flow and consistent outperformance of the market. Speaking of consistent out performance of the market, this is a company which in 2017 was up 58%, up 7% in 2018. But remember, the market was down in 2018. So it still managed to go up. It was up 20% in 2019, 36% in 2020. And given that I target a 40% return, there’s a couple of years there which are good in terms of what I’m looking for.

2021, when everybody went into the growth and the tech stocks and all the rest of it, they only managed 3.8%. And I think it’s going to make up for that, because so far in 2022, it’s up about 6%. In other words, it’s up, it’s bucking the broader market trend, and that’s impressive. And that’s the kind of thing that I want to look for as well. Okay. So what are the things in terms of figures that impressed me? Well, turnover has been growing year on year. Total borrowing, whilst it’s been rising, has resulted in assets increasing. So I don’t mind when borrowing goes up if assets increase and net asset value increases. Earnings, both measured as pre-tax profit and also earnings before interest and tax, have been rising almost exponentially. Of course, it can’t continue exponentially, but really good, nice, strong, upward move, just also with operating cash flow as well.

So all of those factors – green lights for me. In terms of safety, remember it’s an insurance company so want to look at the claims ratio, good debt to market cap, not an issue. Ability to pay dividends, that’s going to become more important if the market continues moving lower. All of those things… good, good hefty fat profit margin, return on equity is strong. Okay, return assets strong. The only sort of slight ointment, and I think they’re going to be forgiven for this because there’s not going to be many companies which have so many boxes ticked, is whilst turnover is forecasted to grow – good – pre-tax profits are forecasted and earnings per share are forecasted to dip. Would it worry me? Normally, yes. However, in this case, given all the other factors in its favor, I’m not so worried at all, including just some of the analysts being a bit cautious in target price.

I think it’s a good one. It fits a lot of my criteria. And remember, this is just a taster, okay. This is not a “Buy” recommendation. This is just a taster of a stock I want to focus on, give you an insight into how I’m thinking given how the markets are at the moment. So it gives you that insight, not just in throwing a name at you, but also giving an understanding of the kinds of things I look at. So think of it in that regard. The other thing, talking about the broader market, is this: I think there’s four scenarios, or four options, that might happen. Okay. The first one is – and we’ve pretty much missed the boat on this one – is that, and I’m looking at the S&P 500 right now, is that it keeps to trend. Okay.

I think there’s only a 15% probability of this happening. It dips back a little bit and then just keeps going at the fast pace it’s been going since… well, since roughly about 2020, a breakneck speed, which is unsustainable because companies can’t grow that quick for that long. So I think Option A, the least likely. Option B, the most likely, is it keeps to its longer-term trend, or rather it’s medium-term trend, the trend that it’s been in place since about 2011. So for the last 11 years, there’s been this steady, upward trend. It’s sometimes gone above it and then it’s fallen back, keeps to that. That would mean further market falls, but then finding an upward based on which to continue rising thereafter. Okay. Option C, falls back more sharply. That could be because the Russians going to Ukraine, the market overreacts, could be all sorts of reasons, but for whatever reason, falls back more sharply.

I think there’s only a 15% probability of this. And then Option D, the sort nightmare scenario – I say nightmare because the fall would be about a 50% fall from current levels – would be it falls back to the low points of March 2020. And you might think, “Well, that’s foreseeable. March 2020 only feels like yesterday.” Okay, but it does put it back to about 2017 levels. So we’d be pretty much ignoring all the profits companies have made since then. And I think there’s only a 10% probability of that happening. There are some pessimists in the market who think that’s more likely. All this tells me that we’re here at a time when actually stock picking and the kind of research service I’m focused on is going to be more important than ever because it’s not a rising tide anymore. We’ve been spoiled for so long where you could have thrown a dart at a dart board and any idiot would’ve made money.

Now you’re going to need all that extra data and research. And I hope what I’ve shown here is that’s exactly what I’m about. Okay.

So I want to thank you for watching. As you know, my name’s Alpesh Patel. I’m a hedge fund manager.

I want to also suggest this: Please, send me your tickers… send me the stocks you’d like me to analyze. Let’s not just worry about the Stocks of the Week that I like.

How about I go through the analysis on stocks you are curious about? Send it to mailbag@manwardpress.com, and I’ll analyze your stocks.

Okay. Hope that’s fair. That way, worst case, you learn something, which is the most valuable thing before, hopefully, you earn something.

Thank you all very much. I’m Alpesh Patel. Thanks so much.