One of my favourite large-cap high conviction buy ideas is QBE Insurance Group (QBE). In my view, QBE is a classic top-down meets bottom-up story that is currently priced for the past, not the future.
Top down
Obviously, at the top-down global macro level, I believe in rising US long bond yields due to QE tapering and accelerating GDP growth. I also believe in a rising US dollar. QBE’s correlation to both those macro themes is extremely high, as evidenced lately by price action around QE tapering timing speculation. The fact QBE confirmed that correlation to long US bond yields, while causing some short-term QBE share price pain, actually reinforces my bullishness.
US 10yr bond yields (blue) vs. QBE (green) last 12 months
But more interestingly…
US 10yr bond yields (blue) vs. QBE (green) last five years
And finally…
US Dollar Index (DXY) vs. QBE (green) last five years.
There is no stock in the ASX20 that has been more punished top down by the actions of the Fed than QBE. On that basis, as the Fed slowly winds down QE over the year ahead, there should be no ASX20 stock that benefits more than QBE.
Bottom-up
That is what attracts me to QBE top down, but I am also finding a high conviction bottom-up story that currently seems underappreciated by investors.
US dollar (USD) earnings bottomed for QBE in CY12 (Calendar Year 2012). The consensus view is that USD EPS (Earnings Per Share) rises from here, a view our analysis agrees with. The target is for plus 50% USD EPS growth in CY14/15 combined, and obviously that’s before it’s translated back to Australian dollars (AUD), in what should be a falling AUD/USD overlay.
QBE is a cheap growth stock with a rising dividend yield, albeit the dividend yield is only 30% franked.
Focus on CY14 and CY15 estimates, where P/E’s drop to low double-digits and price to book just over 1x. That’s cheap for double-digit EPS and DPS growth.
Margins and ROE are also rising strongly.
QBE is currently as unpopular and lowly rated as both SUN and IAG were two years ago.
QBE remains a core member of my high conviction buy list and is the number 1 ASX20 play on QE tapering.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Penny Pryor: Buy, Sell, Hold – what the brokers say
- Geoff Wilson: Graincorp – the odds are in your favour
- Barrie Dunstan: Why you need international shares
- Uday Cheruvu: Try this global blue chip – Chicago Mercantile Exchange Group
- Tony Negline: How much is enough?
- Paul Rickard: Where to go for low-volatility yield
