One of the things that bargain hunters often like to look for in a stock is a price sitting at or near historical lows.
That might sound counter-intuitive – especially if you’ve focused mostly on growth-focused investing strategies. It’s a little more natural to look for stocks that are trending upwards, and that are at or near historical highs, because one of the precepts that we hear about all the time is that a market that is going up, tends to keep going up. Value investing flips that script by recognizing that all trends are finite, and eventually have to reverse. That is the principal reason that bargain hunters like to see stocks at the low end of their price ranges. Not only are those the times that represent the greatest opportunities for a more profitable result than jumping on after the upward move has already started, but it’s also when the probabilities of success begin to shift in the favor of a patient investor willing to take a long-term view.
The best value investors aren’t just programmed to think in a contrarian, long-term mindset; they also understand how to recognize when short-term changes in a stock, an industry or an entire sector begin to play into their favor. One of the most recent examples came in the Banking industry. Massive, sudden customer withdrawals, first at Silicon Valley Bank, and then at Signature Bank prompted federal regulators to assume control of those companies to protect accountholders in the U.S., while a similar crisis at European banking tentpole Credit Suisse A.G. prompted Swiss regulators to broker a takeover by its chief rival in Zurich, UBS. Those events shook the entire market, to say nothing of the financial sector itself and the banking industry specifically.
Banking uncertainty spread to related industries within the financial sector like asset management and insurance. A good example is Principal Financial Group (PFG), a company that is probably best known in the U.S. for its insurance business but also includes asset management and retirement services, with a footprint that extends outside the U.S. to include Latin America and Asia. The stock was hovering in the high $80 to low $90 range to start the year before the banking news I just described shook the entire sector. The stock followed in sympathy with most Financial stocks, plunging to a mid-March low at around $69 before rebounding a little and beginning to stabilize near to the stock’s current price at around $74.
PFG is a company with some notable fundamental strengths, including healthy Free Cash Flow, very good liquidity and a conservative debt load; however there are other pressures in place, including declining margins and negative growth in critical elements of their revenue stream, like fee and investor income, and rising, adverse trends in insurance claims. What does that mean about the stock’s current price? Is the nearly -20% drop in price since last month enough to make the stock a useful value? Let’s try to find out.
Fundamental and Value Profile
Principal Financial Group, Inc. is a financial company, which offers businesses, individuals and institutional clients a range of financial products and services, including retirement, asset management and insurance through its diverse family of financial services companies. The Company has four segments: Retirement and Income Solutions, Principal Global Investors, Principal International, and U.S. Insurance Solutions. Retirement and Income Solutions operations into two business groupings: Retirement and Income Solutions-Fee, and Retirement and Income Solutions-Spread. Principal Global Investors segment manages assets for investors around the world using focused investment teams that provide diverse investment capabilities including equity, fixed income, real estate and other alternative investments. Principal International segment has operations in Latin America and Asia. Its U.S. Insurance Solutions segment offering include specialty benefits insurance and individual life insurance. PFG has a current market cap of about $18 billion.
Earnings and Sales Growth: Over the last twelve months, earnings shrank by -8.11%, while revenues declined by about -23.7%. In the last quarter, earnings growth was flat, but positive, at 0.59%, while sales declined by more than -32%. The company’s margin profile is very healthy on a trailing, twelve-month basis, at more than 27.5%, but withered to -0.3% in the last quarter. That sudden, massive drop to negative Net Income is a significant red flag that I don’t think can be underemphasized. I take it as a sign of increasing risk in the quarters ahead.
Free Cash Flow: PFG’s free cash flow is very healthy, at a little more than $3 billion in the last quarter. That marks a useful increase from about $2.8 billion three quarters ago, and translates to a very healthy Free Cash Flow Yield of 17.21%. That does provide a counter to the turn to negative Net Income picture I just described that may help minimize some of the company’s near-term risk, however that will only be confirmed or refuted in the quarters ahead as new data is reported.
Debt to Equity: PFG’s debt to equity is .4, which implies that PFG employs a conservative approach to its use of leverage. Their balance sheet shows a little more than $7.3 billion in cash and liquid assets against about $4 billion in long-term debt. PFG has healthy, improving liquidity; a little over a year ago, their balance sheet showed just a little over $5.4 billion in cash, and $4.9 billion in the quarter prior to the most recent earnings report.
Dividend: PFG pays an annual dividend of $2.56 per share, which works out to an annualized yield of 3.5% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at around $59 per share. That suggests PFG is overvalued, with about 19.5% downside from its current price, and a useful discount price at around $47.50.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend from a July 2022 low at around $61 to its November high at about $96. It also provides the reference for the Fibonacci retracement lines on the right side of the chart. The stock tried to consolidate at the top of that trend through middle February, but started to fade back into the start of March, when the failures of SVB, Signature and Credit Suisse all contributed to the Financial sector’s collapse. The stock hit bottom quickly at around $69, and has since been hovering between immediate resistance at around $74.50 and current support at around $71 per share. A drop below $71 will find next support at around $69, with additional downside to $65 where the 88.6% retracement sits if selling pressure increases. A push above $74.50 should find next resistance at around $80, a little above the 50% retracement line and consistent with pivot highs seen in August and September of 2022.
Near-term Keys: The stock’s plunge to its current consolidation range is a tempting pattern for contrarian bargain-hunting investors. Unfortunately, however the stock’s value proposition doesn’t support PFG as a useful long-term opportunity. There are some interesting fundamentals strengths in place, however before I would reconsider my evaluation of this stock, the company’s current, negative Net Income pattern would need to show measurable improvement. That means that the best probabilities lie in short-term trading strategies. If the stock pushes above $74.50, you could consider buying the stock or working with call options, using $80 as a speculative, but attractive profit target given the current, clear downward trend. A drop below $71, on the other hand could be a good signal to think about shorting the stock or buying put options, using $69 as a quick-hit profit target on a bearish trade, and $65 very possible if selling activity picks up again.