US Equities
In 2003, the insurance, and the banking sectors underperformed the S&P 500. While the benchmark had a return of about 29% for the year, the insurance sector delivered a 21% return, and the banks had a return of about 27%.
As valuations are still high, we prefer invest in the laggards, and therefore, focus on these two sectors in the short-term.
In the insurance sector, we recommend Allstate Corp. (ALL, $44.70, CSFB: Outperform), and IPC Holdings Ltd. (IPCR, $42.91, CSFB: Not rated).
Allstate stock price rose about 24% since our recommendation in mid-August 2003. We increased our target price to $49, because we believe there is still a room to increase. ALL has a P/E of 12x, compared with a P/E of 22x for the S&P 500 Insurance index.
IPC Holding is our recommended mid-cap re-insurer. We see a fair value at about $44, which is conservative in our view, given a P/B ratio of 1.38x, compared with a P/B ratio of 1.85x for the larger capitalized insurers.
In the banking sector, we recommend Wells Fargo & Co. (WFC, $57.19, CSFB: Outperform), Bank of America Corp. (BAC, $79.02, CSFB: Outperform), and Hibernia Corp. (HIB, $23.53, CSFB: Neutral).
We believe Wells Fargo is suitable as a long-term growth play. Its position covering the entire US reduce the geographical risk. Furthermore, the balance sheet is among the healthiest in the sector. Finally, it gives an attractive gross dividend yield of 3.15% (source: Bloomberg).
Higher stock price volatility characterizes Bank of America. Therefore, we have a trading buy on this security, with a trading range from $68 to $95. Good fundamentals and gross dividend yield of 4.05% (source: Bloomberg).
Hibernia is a regional bank in Southern U.S. On January 15, the company reported a 4Q EPS of $0.46, in line with the consensus expectations. This result represented a 5% increase from 3Q and a 10% rise y-o-y. For the full year, HIB reported earnings of $1.64, up 5% from year ago results. The company expects earnings to grow 8% to 10% in 2004. We have a Buy rating on this mid-cap.
Express Scripts Inc (ESRX, $68.30, CSFB: Outperform), the pharmacy benefit manager on the US Recommendation List on Friday hit our 12-months price target of USD 67, closing at USD 68.30, returning 18.80% since recommendation on October 22.
Express Scripts was added as one of our mid-cap ideas and in the meantime has surpassed the USD 5 billion in market cap, moving into the large cap segment. Nevertheless, the growth perspectives for the company remain intact.
Playing a key role helping benefit sponsors to restrain the rapid growth in pharmaceutical cost, pharmacy benefit managers face a friendly environment and should profit from a growing customer base, as well as from the increasing Medicare spending.
Hence we see further upside in Express Scripts share price and increase our 12-months target price to USD 74, an incremental 8.35% from current levels. We would like to advise investors taking partial profit in Express Scripts.
In the past few weeks risk appetite in US equity markets has increased, which has resulted in sharp price increases in stocks that have been lagging the market due to weak fundamentals.
Like stocks in the communication equipment sector, the networking companies have in the last two weeks experienced a revival. The rally, which was initiated by improving sentiment towards IT spending and upbeat earnings in the sector has however also led to a multiple expansion in these stocks.
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- Tuesday, January 20 - 2004 at 15:44
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As US valuations are high we prefer to invest in the laggards like insurance and banking, and therefore focus on these two sectors in the short-term.
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Credit Suisse, Private BankingTuesday, January 20 - 2004 at 15:44 UAE local time (GMT+4)
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This article was updated on Mon Apr 23 2007.
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