Should I invest money and buy shares in Alleghany Stock?
This articles explores if now is a good time to invest money into Alleghany shares.
Stock Name and Stock Exchange Platform
Alleghany Corporation – NYSE (New York Stock Exchange) (NYSE: Y)
The Stock Sector
Alleghany is a US investment holding company specializing in property and casualty insurance and manages subsidiaries that focus on the financial services sector. It was founded in 1929 by the Van Sweringen brothers. It has a long interesting history since its founding date.
Alleghany insurance is headquartered in New York City, US. It operates in three main segments reinsurance, insurance, and Alleghany Capital (Private equity). These segments’ underwriting activities are evaluated separately from investment and corporate activities.
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Recent News on Alleghany
Alleghany has become the talk of the town in the markets following its acquisition by Warren Buffet’s Berkshire Hathaway Corp for a staggering $11.6B. This transaction is set to be completed by the end of 2022.
This is Berkshire’s largest acquisition in about five years, a move that might be similar to their Apple and Precision Castparts deals in 2016.
Alleghany strongly resonates with Berkshire’s philosophy to some degree. The two corporations share both intellectual and operational synergy. Additionally, Alleghany’s CEO, Joseph Brandon, used to run Berkshire’s insurance from 2001 to 2008, and is Buffet’s long-time friend.
The insurance sector is Buffet’s Forte and sphere of influence hence the purchase is not surprising. The acquisition is pricing Alleghany at a 16% premium to its 52-week high closing price.
Alleghany’s share price went up by at least 25% since the deal. Alleghany recently announced its Q4 results in February 2022, it performed generally well.
The acquisition has conversely brought controversy, with Weiss law investigating Alleghany on the grounds of possible breaches of fiduciary duty and other violations of law by the Alleghany board.
Weiss law believe the board did not act in the best interest of the company shareholders and the merger will overcompensate them.
Alleghany is looking to handle these queries. Warren Buffet has shown contempt for bankers and has lowered the take-over price. The stock has soared over the past week and predictions say that a bidding war for the company could soon ensue.
Current Position of Alleghany
Alleghany has been in a good position over the years. It is fairly large with a market cap of $11.5B. Alleghany has maintained a stable position and has been moving horizontally over the years.
Insurance companies like Alleghany have performed well in the past decade. Buffet won the bet that hedge funds would be beaten by Insurance firms.
As he simply put it, an insurance firm is a hedge fund that keeps 100% of an investor’s profits. This gives them good leverage as they have an influx of capital coming in. They then invest it in traditionally safe assets like bonds and others. The lower the claims the higher their returns.
Alleghany’s financials are looking good with the premium per share rising steadily. Alleghany currently employs at least 13,000 employees according to the latest numbers.
Alleghany operates several subsidiaries that operate as independent units anchored by its core position in the insurance industry. These subsidiaries include Alleghany Capital Corporation, TransRe, RSUI Group, CapSpecialty.
Alleghany’s underwriting loss was at $200M in 2021, the lower it is, the better as it indicates fewer claims hence higher returns for them. The expense ratio has increased by a little due to an increase in operating expenses over the years, but it is still pretty good.
Generally, the combined ratio for 2021 was 97.2%, hence it is roughly okay below 100%.
Alleghany takes a long-term perspective and values growth, over time, rather than short-term market gains. Alleghany has a good float and good underwriting.
As of the 26 March 2022, Alleghany’s stock traded $860 per share, an uptick of +1.23% from the previous close. It is trading at a day range of between $846.8 and $852.87. (See stock chart at the end of this article)
This trading price has marked its 52-week high, with a record low of $528 recorded in the past year. It is up +1.59% in the past week and +29.93% in the past month.
The share price of Alleghany is also in the green long-term, rising by a striking +37.85% in the past 6 months and up +34% in the past year. It has been a great five-year return, up by +39.91% over this period.
The volume of shares traded for Alleghany insurance currently stands at 131.77K. Its all-time maximum return is at an impressive +2363%.
In the past 38 years, the recent peak has marked its all-time high, recorded at $860 on 25 March 2022.
The Alleghany share price is questionable as we are in a bull market. The acquisition has contributed largely to the upswing and it is unknown if they can sustain this. The stock is very dependent and responds to the motions of the market.
This is considered unstable as it increases the average distress rate of the stock. Many investors expect a short-term decline for Alleghany to bring down the inflated price.
However, Alleghany insurance are looking good long-term and Buffet takes such positions in a company. Berkshire is paying a significantly high premium for the company since they look to control the business and not the stock.
Investors should be wary in making an entry into the Alleghany stock. As great as it may seem, chasing an asset on its way up and near the top is not financially sound. I tend not to buy into spikes if I can avoid it.
Sentiment on Alleghany
The Oracle of Omaha is revered for his investment moves. He has beaten the market for over half a century and his acumen is unparalleled.
When Buffet buys, the market watches, and follows suit. It is however notable that Berkshire has a long interest in the company, and has huge cash reserves to hunt for new engagements. It still has over $130B in cash and equivalents in its balance sheet.
Historically, rising interest rates have meant that insurance companies see great returns on their bond investments, and thus receive high profits. This translates to a higher share price.
The recent development in the price of Alleghany is solely based on the acquisition and the future expected growth. The share price is fairly jacked up at the moment and it could likely level down before it takes off.
Buffet’s partner and respected investor, Charlie Munger seemingly disagrees with the deal. Buffet has reaffirmed that Berkshire will be the perfect home for Alleghany, having watched it for over 60 years.
They are glad to have settled on this one as they both have said that there is nothing that excites them that much in terms of large deals
Profits for Alleghany
Alleghany has been a big gainer in terms of profits. They have posted a remarkable margin growth over the past five years.
Their Q4 earnings show an underwriting profit of $205M. They are however still below their pre-pandemic level where underwriting profit was $254M.
The annual underwriting profit was at $195M. Revenue was up by +33.47% valued at $3.55B in December 2021.
The net income skyrocketed by +224.49 recorded at $516.17M. The net profit margin was at 14.52%, a stellar +143.22% surge.
Operating income went up by +187.05% estimated at $734.7M. The net change in cash was -$67.54M but still an increase of +84.62% year-on-year.
Cash and equivalents were at $927.97M, up by 17.25%. the P/E ratio was at a low of 11.52, indicating very strong potential and undervaluation. Alleghany has very promising profitability.
Future of Alleghany
Alleghany is a good company that has been around for a long time. Their foundation metrics are strong and they are likely to remain in the insurance industry for a long time.
Interest rates are sure set to go up due to efforts by the central banks to stop hyperinflation. When interest rates go up, it shows a growing economy, and people gain returns from their savings.
This tends to trigger a buying spree of houses, cars, and other commodities hence more profits for insurance companies.
Alleghany has had a lot of free cash flow over the past year estimated at $1.77B. This has enabled them to repurchase their stock ($250M in 2021), thus decreasing the shares outstanding and contrastingly increasing shareholder stake in the company. This attracts capital to the company.
Their price to book value (P/B ratio) was initially at 1.09 which is considered above fair value, but it is currently looking good at 0.9344 which shows undervaluation.
The debt-to-equity ratio for Alleghany has been somewhat worrying at 2.51 but its phenomenal growth could easily rectify this. Their return on equity was at a solid 11.5% and the Price to sales ratio was a good 0.78.
The five-year revenue growth was at a spectacular +86.8%. Alleghany’s main competitors include Progressive Corporation, W.R Berkley, and Berkshire Hathaway which is now to be part and parcel of it.
The future for Alleghany almost guarantees success.
So should I invest money in Alleghany stock and buy $Y shares?
Alleghany is set to do well especially now with the legacy of Berkshire. The stock is however unusually high and it is best to wait for more downside to get in on the action.
Moody’s ratings are now considering upgrading its (Baa1 senior) ratings on the company.
Moving averages suggest a strong buy and Oscillators suggest a buy. Alleghany is an overall buy in the medium to long-term as it’s looking bullish in the long run.
Alleghany Stock Price Chart
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