On St Valentine’s Day Insurance Australia Group (IAG) delivered shareholder love with the announcement of a 24% lift in first half profit. Management also re-iterated their estimate of the annual operating margin in the 15.5% to 17.5% range. The market took off to make all-time highs for IAG above $8 per share.
IAG has grabbed a lead on its industry peers. Suncorp’s net profit fell 16%, and QBE reported a net loss after significant write downs and increased insurance losses. IAG’s engagement with Warren Buffet and the subsequent pivot to globally re-insuring risk could be a key driver, given that written premiums and revenues increased much more modestly.
IAG is now facing the same problem faced by many market darlings. One misstep and the share price could crater – and missteps are almost guaranteed in the insurance industry (declaration of personal bias – the author does not invest in insurance shares). Around $8 a share the PE ratio is close to 18x next year’s earnings and a dividend yield (last 2 dividends) of 4.5%. This makes IAG look expensive against its peers, financial stocks and the broader market.
The weekly chart (above) illustrates the steepness of the IAG share price rise. The recent stand out earnings result deserves accolades, but the sharp rise puts shareholders in danger territory. It’s harder to identify support as this is a completely new level for IAG shares. From a technical point of view the first downside support is between $7.00 and $7.37. And a pull back to a zone between $6.40 and $6.60 cannot be ruled out.
“Don’t fall in love with your position” is a well-known saying among traders. The principle could apply here. Investors in love with IAG should consider a break up – at least temporarily.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
CMC Markets Singapore may provide or make available research analysis or reports prepared or issued by entities within the CMC Markets group of companies, located and regulated under the laws in a foreign jurisdictions, in accordance with regulation 32C of the Financial Advisers Regulations. Where such information is issued or promulgated to a person who is not an accredited investor, expert investor or institutional investor, CMC Markets Singapore accepts legal responsibility for the contents of the analysis or report, to the extent required by law. Recipients of such information who are resident in Singapore may contact CMC Markets Singapore on 1800 559 6000 for any matters arising from or in connection with the information.