You’ve heard the investment legalese “past performance is no guarantee of future performance” countless times. Of course, nothing is guaranteed; however, as another saying goes, “ignore the past at your own peril.”
When investigating insider buys, we aren’t looking for guarantees but sure as hell pay close attention to past performance. Let’s face it, insiders make decisions based on all information, which includes public and private info. If a corporate executive, especially those at the top of the chain, have a history of profitable trades, you would be foolish not to at least investigate.
The Hartford Financial Services Group, Inc.’s (HIG) is worth review after its Chief Executive Officer’s (CEO) recent purchase. Christopher Swift bought a quarter-million dollars of HIG at $35.98 on September 23, 2020. (1) In total, including last week’s buy, the CEO has moved in and out of HIG stock four times.
Swift’s first trade was a $499,528 buy on January 10, 2019 at $43.73. In September 2019, he switched sides on Hartford, selling $3.7 million of HIG at $59.94 and two-months later another $1.9 million sell at $62. Other than the quartet of open market trades, all of Swift’s other HIG transactions have been tax or options related.
Despite lawyerly advice, it’s hard to ignore CEO Swift’s history of buying low and selling high. Famed Mutual Fund manager Peter Lynch’s words on insider trading come to mind, “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” (2)
Wall Street expects the insurance company’s stock price to rise too. The one-year consensus price target is $52.20 (3), or 43.7% higher than where HIG trades as we type, $36.32. At the current level, The Hartford appears fairly valued relative to its immediate, diversified insurance peer group but undervalued relative to the broader financial services industry.
Without much ground to be gained from a peer group valuation standpoint, HIG’s price performance will likely be more company specific. Earnings per share (EPS) are expected to take a nice step forward in 2021. The consensus estimate for next year is $5.29, up from this year’s forecast of $4.75. (4)
Since 2015, investors have been willing to pay an average of 12.13 times earnings. If HIG hits analysts’ bullseye, makes $5.29 and trades with a price to earnings (P/E) ratio of 12.13, shares would trade at $64.17. Hartford’s lowest P/E in the last half-decade was 6.29. Again, the trusty calculator says HIG would trade at $33.27 based on next year’s EPS number and five-year low price to earnings ratio. As we type, the Street is paying 7.14 times the bottom line. At the current level and with $5.29 in EPS, we get a target price of $37.77.
None of the potential price targets includes the current dividend of $1.30 per share (a yield of 3.52%).
Overview: The Hartford Financial Services Group, Inc.’s (HIG) appears to offer investors a strong risk to total return opportunity. On the downside, shares could trade at $33.27 based on the insurance company’s five-year P/E low and next year’s expected earnings. To the north, the stock could find the mid-$60s using the recent average P/E. That’s approximately $3 downside and $30 upside, a 10 to 1 reward to risk ratio for investors.
Perhaps, Hartford CEO Christopher Swift has done the same math and is looking for a repeat performance from his January 2019 purchase.