IAK: Despite Mediocre Recent Performance, Fundamental Strengths Remain

seekingalpha07-12

IAK remains a buy due to strong earnings and profit margins of top holdings, favorable valuation, and potential market correction protection.Top holdings of Progressive, Chubb, and AIG show promising ...

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Remain\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-07-12 01:03 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4703568-iak-despite-mediocre-recent-performance-fundamental-strengths-remain><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>IAK remains a buy due to strong earnings and profit margins of top holdings, favorable valuation, and potential market correction protection.Top holdings of Progressive, Chubb, and AIG show promising ...</p>\n\n<a href=\"https://seekingalpha.com/article/4703568-iak-despite-mediocre-recent-performance-fundamental-strengths-remain\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0057025933.USD","symbol_name":"SUSTAINABLE GLOBAL THEMATIC PORTFOLIO \"AX\" (USD) 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A","LU0106831901.USD":"贝莱德世界金融基金A2","LU0251142724.SGD":"Fidelity America A-SGD"},"translate_title":"IAK：尽管近期表现平平，但基本面优势依然存在","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AIG":1,"CB":1,"IAK":1,"KIE":1,"KBWP":1,"PGR":1,"VOO":0.9,"SPY":0.9,"FDN":0.87,"BRK.B":0.61,"OEF":0.6,"OEX":0.6,"SDS":0.6,"SH":0.6,"SPXU":0.6,"SSO":0.6,"UPRO":0.6,"ESmain":0.6,"IVV":0.6,".SPX":0.6,"AAPL":0.3,"NVDA":0.3,"MSFT":0.3},"content_text":"IAK remains a buy due to strong earnings and profit margins of top holdings, favorable valuation, and potential market correction protection.Top holdings of Progressive, Chubb, and AIG show promising earnings, global industry growth, and attractive valuations compared to overvalued tech companies.Market valuation indicates potential correction, making IAK and peer funds like an \"insurance\" policy against market drop, with low correlation to broader market.   MicroStockHub Investment Thesis iShares U.S. Insurance ETF (NYSEARCA:IAK) still warrants a buy rating due to multiple fundamentally strong factors for both the insurance industry and IAK’s top holdings. Notably, IAK’s top companies have shown strong earnings and have also increased their profit margins. Finally, IAK remains favorably valued while the overall market has demonstrated increasing signs of impending correction. Fund Overview and Previous Coverage IAK is an ETF that seeks to capture U.S. equities in the life, property and casualty, and full line insurance industries. I wrote previously on the fund in late April and rated the fund a buy. For comparison purposes, other funds examined are SPDR S&P Insurance ETF (KIE) and Invesco KBW Property & Casualty Insurance ETF (KBWP). Despite the fund’s relatively flat recent price return of less than 1% since that article, I reiterate a buy rating due to its fundamental strengths discussed in this article.   Recent Price Return for IAK and Peer Insurance ETFs (Seeking Alpha) IAK has seen a 10-year average annual return of about 11% which is also on par with peer funds. IAK has an expense ratio of 0.4%, slightly higher than peer funds at 0.35% each. IAK also offers a dividend yield of 1.38%, slightly lower than peer funds at about 1.50%. IAK is the most diversified among the two peer funds with 55 holdings. Despite underperforming the overall market over the past six months, as measured by the S&P 500, IAK demonstrates characteristics that are less volatile than the market. Additionally, as I will discuss later, there are multiple reasons to expect a more muted price drop with IAK in the event of the next major correction or bear market. IAK Holdings and Key Outlook Factors Since April, IAK’s top holdings have remained roughly the same with top-weighted companies being Progressive (PGR), Chubb (CB), and American International Group (AIG) taking top positions. Together these three companies constitute over one third of the fund.   Top 10 Holdings by Weight for IAK ETF (iShares IAK Website) Looking forward, there are multiple reasons to have even greater optimism for IAK than was seen in April. Recent quarterly reports from Progressive and Chubb, IAK’s #1 and #2 holdings, were both promising to include strong revenue and net income margins. Additionally, growth factors for the insurance industry remain strong. Finally, while the market overall demonstrates multiple indications of being overvalued, IAK has a history of protection in previous corrections due to its low overall market correlation. Positive Outlook Factor #1: Recent Earnings for Progressive and Chubb I previously wrote on the growth of the insurance market despite thin profit margins for the insurance industry. Growth is still strong while profit margins show signs of improvement based on the latest quarterly reports for IAK’s top holdings. Since my last article, PGR published its 10-Q for Q1 which showed a revenue surprise, beating expectations by $1.76B. Notably, Progressive saw an increased net income margin of 13.5%, higher than when I last reported IAK at 8.9%. Chubb Limited also released its 10-Q since my last article with strong earnings and revenue growth of 12.4% YoY. Also impressive for the insurance industry, Chubb has a net income margin of over 17%.   One-Year Price Return for IAK's Top Three Holdings (Seeking Alpha) The market has rewarded these top companies with a one-year return of almost 60% and 35% for Progressive and Chubb respectively. However, despite this increase in share price, both companies, and IAK as a fund overall, still maintain a relatively favorable valuation. This stands in contrast with the overall market as I will discuss later. Positive Outlook Factor #2: Buffett and Global Industry Growth Another positive outlook factor for the insurance industry is that some big-name investors have taken note of strong forecast growth. In May, it was announced that the “Oracle of Omaha,” Warren Buffett, acquired 26 million shares of Chubb valued at about $6.7B. Chubb’s buy falls in line with the value investor’s strategy to acquire quality companies that are attractively valued. At 12.9% weight, CB stands at IAK’s #2 holding, which saw a price boost after this announcement. Chubb is not the only company poised to profit from growing insurance industry. Overall, the global insurance market is expected to grow at a 5.5% CAGR.   Forecast Growth of Insurance Sub-Industries through 2034 (National financial supervisory authorities, Axco, LSEG Datastream, Allianz Research) The above figure indicates the forecast growth of insurance type by geographic region, as measured by additional gross written premiums. For example, North America alone is expecting a 70.4% increase in additional gross written premiums for health insurance by 2034. Property and casualty insurance, life, and health insurance all expected to see strong growth globally. Positive Outlook Factor #3: Overall Market Valuation and Downside Protection The final key outlook factor that has further heightened since April is the valuation of the market overall, led by big tech. Since late April, Microsoft (MSFT), Apple (AAPL), and NVIDIA (NVDA) have seen share price increases of 14%, 36%, and 55%, respectively. I considered these mega-cap, big tech holdings to be a bit overvalued, despite their growth potential.   U.S. Market P/E: 2013-2024 (Morningstar Direct Data, as of Feb '24) Looking at data from 1961 to 2019, when the S&P 500 Index’s price-to-earnings ratio is above 22x, the 5-year subsequent annualized total returns is only 0.3%. The subsequent one-year annualized total return after the market is this highly valued is -6.4%. Of note, the S&P 500 stands even higher than the 24.01 indicated in the figure above and now holds a P/E of over 29. In contrast, PGR, CG, AIG P/E ratios are much more attractively valued. This has historically resulted in IAK offering some level of protection during broad market corrections. For example, in 2022, while the S&P 500 Index saw a -18.2% drawdown, IAK saw a price return of +11.3%. Therefore, IAK and similar peer funds still may act as an “insurance” policy against this drop. Interestingly, despite Buffett’s buy of Chubb, he dropped 115 million shares of Apple, reducing Berkshire Hathaway’s stake by 22%. While it remains the largest holding of Buffett’s company and he stated the AAPL shares were sold for tax reasons, I find it interesting the timing and combination of increasing Chubb’s stake. Current Valuation  The S&P 500 Index is currently dominated by mega-cap, IT companies with high valuations. MSFT, AAPL, and NVDA are standing at a 40.4, 36.3, and 78.8 P/E respectively. While big tech rightfully trades at higher price-to-earnings multiples due to potential growth, this also puts them at risk of steeper correction and volatility. In contrast, IAK’s top holdings of PGR, CB, and AIG P/E ratios stand at 21.5, 11.4, and 11.3, respectively. As a result of this disparity, the overall P/Es for insurance funds are significantly more attractive than the overall market. This has only heightened since my last article in April. The S&P 500 P/E ratio in April 2024 was 26.57 and now it stands at 29.18, an increase of almost 10%. By contrast IAK’s P/E has only increased over 2% in this time. Valuation Metrics for IAK and Peer Insurance Funds     IAK KIE KBWP S&P 500   April P/E ratio 14.80 10.27 14.57 26.57   July P/E ratio 15.14 11.30 12.81 29.18   Percent Change +2.29% +10.0% -12.08% +9.92%   Click to enlarge Source: Compiled by Author from Multiple Sources, 11 Jul 24 Risks to Investors A key consideration factor for IAK and peer funds is their relatively low correlation to the market overall. This could act as a risk mitigation factor for investors already heavy on S&P 500 funds or mega-cap tech holdings. With a 3-year beta value of 0.59, IAK has a relatively low correlation to the rest of the market. Despite the above points, a key risk to my thesis is that the broader market continues to outperform IAK and other insurance ETFs. This may be possible as the U.S. Federal Reserve hints towards interest rate reductions. However, given the historically high P/E of the market overall, there are increasing signs of broader market correction. Concluding Summary  Despite underperforming the overall market for the past couple months, IAK has strong fundamental strengths that will serve the fund well in the event of a market downturn. Top holdings of Progressive, Chubb, and AIG have a positive outlook, while IAK overall has a trend of reduced share price decline in overall market corrections. Finally, it is interesting that big-name investors such as Buffett have added Chubb while shedding Apple, given the current valuations in the different industries.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2450396015"}