The Hartford Financial Services Group, Inc. (NYSE:HIG) shares are up more than 16.87% this year and recently increased 0.31% or $0.17 to settle at $55.69. Loews Corporation (NYSE:L), on the other hand, is up 6.53% year to date as of 11/13/2017. It currently trades at $49.89 and has returned 0.42% during the past week.
The Hartford Financial Services Group, Inc. (NYSE:HIG) and Loews Corporation (NYSE:L) are the two most active stocks in the Property & Casualty Insurance industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect HIG to grow earnings at a 13.30% annual rate over the next 5 years. Comparatively, L is expected to grow at a 3.84% annual rate. All else equal, HIG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 24.25% for Loews Corporation (L). HIG’s ROI is 5.60% while L has a ROI of 4.30%. The interpretation is that HIG’s business generates a higher return on investment than L’s.
The value of a stock is simply the present value of its future free cash flows. HIG’s free cash flow (“FCF”) per share for the trailing twelve months was +1.38. Comparatively, L’s free cash flow per share was +1.47. On a percent-of-sales basis, HIG’s free cash flow was 2.69% while L converted 3.78% of its revenues into cash flow. This means that, for a given level of sales, L is able to generate more free cash flow for investors.
HIG’s debt-to-equity ratio is 0.30 versus a D/E of 0.60 for L. L is therefore the more solvent of the two companies, and has lower financial risk.
HIG trades at a forward P/E of 12.02, a P/B of 1.16, and a P/S of 1.07, compared to a forward P/E of 16.37, a P/B of 0.88, and a P/S of 1.24 for L. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. HIG is currently priced at a -4.39% to its one-year price target of 58.25. Comparatively, L is 5.41% relative to its price target of 47.33. This suggests that HIG is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.60 for HIG and 2.50 for L, which implies that analysts are more bullish on the outlook for HIG.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. HIG has a beta of 0.98 and L’s beta is 0.74. L’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. HIG has a short ratio of 2.34 compared to a short interest of 1.30 for L. This implies that the market is currently less bearish on the outlook for L.
Loews Corporation (NYSE:L) beats The Hartford Financial Services Group, Inc. (NYSE:HIG) on a total of 7 of the 14 factors compared between the two stocks. L is growing fastly, has higher cash flow per share and has a higher cash conversion rate. Finally, L has better sentiment signals based on short interest.