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Small Cap Insurance Brokers Got It Goin’ On

They may not be the outright leaders for any timeframe, but they’re finishing in the top 20 for all timeframes. Like NASCAR, that sort of consistent strength is how you win the series, even without winning the race. Yeah, well, that’s precisely what I see the small cap insurance brokers doing right now…. doling out big rewards to investors not in spurts, but with persistent and reliable progress. Ironically, at that rate, they’ll actually be the market’s biggest winners a year from now.

I know, I know…. if you’re like most investors, you probably couldn’t name one insurance broker - not an agency or a company - a broker. That’s ok; I’ll be the first to admit they’re obscure, because they’re boring. In the interest of completeness, let’s use National Financial Partners Corp. (NYSE:NFP), Brown & Brown, Inc. (NYSE:BRO), and Aon Corporation (NYSE:AON) as examples. (Those three aren’t coincidental picks though - they’re my favorites. More on why below.)

Like I said, the consistent returns from the group has been attractive to me. In fact, the more turmoil the market goes through, the more interested I become in low beta arenas. Take a look at this chart of the S&P 600 Small Cap Insurance Broker Index, and you’ll see what I mean. Not too hot, not too cold.

That said, stocks can’t go higher indefinitely just because they’re going higher. Eventually, the fundamentals have to support prices. That’s the great part about most of these names right now…. the fundamentals actually do support the price appreciation. (Hey, stranger things have happened you know.)

Take National Financial Partners Corp. for instance…. which is probably my favorite of the three insurance brokers I mentioned. A projected (2010) P/E of 5.73 is not only stunning, it’s plausible. The company’s also topped estimates in each of its last four quarters, and even at the current (TTM) P/E of 19.7, that kind of results deserve to demand a modest price premium.

National Financial Corporation isn’t the only poster child in the bunch though. Small cap insurance broker Brown & Brown is looking at a projected P/E of 16.3, and it too has seen a couple of modest beats lately, though the five cent miss two quarters ago is something to note. Still, the risk/reward ratio remains lopsided on the ‘reward’ side of the equation.

The same goes for Aon Corporation, which is not technically a small cap, but is attractive all the same. The projected (2010) P/E of 10.9 attractive, especially considering it too has managed to beat EPS estimates in most of its last few quarters.

Here’s the thing though…. while the fundamentals are looking good, it’s important - to me anyway - to explain that the technical charting aspects for these stocks are also lining up bullishly, if they haven’t started to carry their respective stocks higher already.

NFP shares, for instance, have simply been walking higher, uninterrupted by whatever curve balls the market’s been throwing. BRO has been in a trading range between $16.57 and $20.26, but that consolidation phase could serve as slingshot when/if Brown & Brown shares finally bust out. And AON? It just fell back to - and pushed off of - a long-term support line. It’s all pretty clear on the combo chart below.

While it wouldn’t be accurate to say every single stock in the bunch is a slam dunk, the group as a whole is looking good right now - the small caps in particular. It’s the kind of thing you want to make a core holding of your long-term portfolio while nobody else even has them on the radar. Boring is beautiful.

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James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.