It may be time for investors who stepped away from the insurers last year to embrace the more positive trends developing in the group now.
The Stock: Industrial Alliance Insurance and Financial Services Inc. (IAG-T) Recent price: $36.16
The Trend
Interest-rate-sensitive stocks are starting to add to the stock market
script as 2010 draws to a close. The U.S. 10-year Treasury yield index
is up 21 per cent this quarter - a shattering move for the bond market.
The Stock Trends filters are now full of bearish trending U.S. bond
funds. Government of Canada 10-year bond yields have crept up this
month, too - rising to a high of 3.3 per cent last week. Reflecting the
rising rates is the slipping performance of TSX-listed bond ETFs such as
the iShares DEX Universe Bond Index fund. Suffering along with bond
funds are interest-sensitive bank and utilities stocks, as well as real
estate investment trusts and preferred shares.
However, one segment of the financial sector enjoys a more positive side
of rising interest rates: the insurance industry. As rates rise, the
value of financial assets supporting insurance liability exposure
expand, improving the health of these firms. The low interest rates of
recent times have been burdensome for the insurance sector, so the
changing rate environment bodes well for these stocks. U.S. insurance
sector exchange-traded funds SPDR KBW Insurance fund and iShares DJ
Insurance Index fund are now testing short-term resistance after
rallying off their 40-week moving averages this month. Aflac reflects
the group's trend, while the stocks of insurers like Prudential
Financial, and MetLife are also showing positive trend alerts. Even the
stock of bailout whipping boy American International Group, in the midst
of recapitalizing as the U.S. government starts to unwind its stake, is
trading at new 52-week highs.
Canadian life insurance stocks are also hitting trend alerts. Although
Manulife Financial has been hit by recent ratings downgrades, its stock
has been in a Stock Trends Weak Bearish category since the beginning of
November, suggesting that its long-term bearish trend is closing out.
One of the current Stock Trends stock picks is Sun Life Financial,
profiled in this column a year ago when it looked to be advisable for
investors to give the stock a cold shoulder. It may be time for
investors who stepped away from the insurers last year to embrace the
more positive trends developing in the group now.
The Trade
Trading in shares of Industrial Alliance Insurance elevated last Friday,
lifting the stock to a high of $37.35 before slipping back to close near
the resistance level the stock cleared after the company's credit rating
was affirmed earlier in the week. The stock began its rally with many
other insurance stocks a month ago, but the share price move above $36
now makes this a more appealing trend trade.
The Upside
Rising relative strength - a comparative performance measurement against
the broader stock market - suggests the stock will regain the valuations
of two years ago when it traded above 13 times earnings. That would add
another 16-per-cent gain on the current share price.
The Downside
If the stock fails to clear the May high of $37.40, it could show itself
as range-bound in 2010. A retreat to the long-term 40-week moving
average trend line around $33.50 would be disappointing.
There is a lot to be gained from comparing trends of how individual stocks are doing within a sector, as well as how the sector is performing relative to the broad market.
