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Life Insurers Are Dead in the Water

I see plenty of short-term headwinds for these financial plays


Last year was a lackluster one for life insurers. Insurers struggled to sell more new policies than in 2011, and low interest rates depressed the returns on insurance companies’ investments.

But lately, things seem to be looking up for some life insurers:

  • Manulife Financial (NYSE:MFC), Canada’s largest life insurance company, has risen over 6%;
  • Prudential (NYSE:PRU), which specializes in life insurance, annuities and mutual funds, has advanced 12%; and
  • MetLife (NYSE:MET), another major provider of insurance, annuities and employee benefit programs, has rallied 18%.

Some bargain-hunters see these stocks as undervalued and think they’re picking up shares on the cheap. They reason that when interest rates eventually rise — Federal Reserve officials have been sending mixed signals on when this will happen — insurers will see fatter returns on their investments. The other thing attracting investors is that these three companies pay fairly attractive dividends; these stocks yield 3.6%, 2.7% and 2.9%, respectively.

But while I am a fan of juicy dividend yields, that shouldn’t be the only thing you’re looking for when picking stocks. And I see plenty of warning signs that have me worried about short-term prospects.

These are all “D”-rated companies right now. My Portfolio Grader screening tool has flagged these companies due to a combination of unfavorable risk-to-return ratios (Quantitative Grade) and lackluster balance sheet items (Fundamental Grade).

And as early as this week, those who have pushed these stocks into the green may be seeing red. That’s because these companies announce first-quarter earnings on Wednesday and Thursday … and the reports probably won’t be pretty.

In the case of Manulife, it doesn’t look so bad at first glance: Analysts forecast 18.5% earnings growth. But there are signs that Manulife is going to underwhelm analysts. First, this company has a poor track record — it has missed the consensus earnings estimate for the past several quarters. Also, analysts have been cutting their estimates for Manulife. In the past three months, the consensus earnings estimate has fallen nearly 9%. So when Manulife announces earnings before Thursday’s open, I expect it to whiff.

It’s a similar story with Prudential Financial. While the consensus calls for 16.6% sales growth and 21.2% earnings growth, this company isn’t known for living up to expectations. Like Manulife, Prudential has fallen short of consensus earnings estimates for the past several quarters.

And the picture is pretty clear with MetLife: Analysts expect the company to post 3.8% year-over-year sales growth but a 5.1% drop in earnings.

The bottom line is that while interest rates will eventually rise, and some of the headwinds in the life insurance business will disappear, I’m not comfortable with these companies’ short-term prospects. I’d avoid these stocks until fundamentals show signs of lasting improvement.

Louis Navellier is the editor of Blue Chip Growth.

Article printed from InvestorPlace Media,

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