This morning I sat down and spent some time with the latest edition of Value Line. As usual, I first looked at the list of stocks trading at the widest discount from book value. Although I frequently screen for stocks that are trading cheaply on asset value, no screener is perfect and I overlook some from time to time. Since I want to leave no stone unturned, I always make it a habit to thoroughly read each edition for potential ideas.
I did indeed come up with one this week. The stock is based in Europe, does not pay a dividend and has debt levels that might not make it through my basic filters. The stock has really been hit hard in recent weeks due to ongoing debt concerns throughout Europe and company specific concerns relating to repaying emergency aid during the credit crisis. In spite of this Dutch life insurer Aegon (AEG) appears to have plans in place to restore profitability over the next few years. The company has exited the institutional business sin the U.S. and has placed its Guaranteed Investment Contract (GIC) business into runoff mode. Aegon sold TransAmerica Reinsurance and raised equity capital to pay back the Dutch government, and this clears the way for a restoration of the dividend in the spring of 2012.
After its recent selloff, the stock is cheap on the numbers. In fact, trading at less than 50% of tangible book value, the stock is at "too cheap not to own" levels. Earnings are not exactly robust, but the company has returned to profitability this year. Impairment charges in the first quarter were the lowest they had been in the last three years and that bodes well for future earnings growth potential. Aegon has cut back its exposure to the more troubled PIIGS countries of Europe (Portugal, Italy, Ireland, Greece and Spain) and is expanding into new and faster-growing markets. In the Americas, which account for more than 70% of the company's profits, the variable annuity business has been stable, partially offsetting the decline of the fixed annuity business. If the company comes anywhere close to the highly accurate analyst estimates for the year, the stock will be selling for less than 8x earnings. Even after repaying the Dutch government, the company has plenty of excess capital and its balance sheet is in decent shape.
I think investors with a longer time horizon may want to buy this stock now. This stock was trading above $20 a share as the credit crisis began to create turmoil in the global markets back in 2007. If the stock reverses to even a fraction of those price levels, the stock could be a home run. A return to half the old highs would more than double your money from the current price. The stock is very cheap and with all the cheap European financial stocks I am seeing, this management team has a reasonable plan to return to a normal growth trajectory. Staying small and moving slow makes a lot of sense. Buy a few shares at current levels and plan to scale into the rest of your positions.
It is also worth attempting to back into the stock by selling puts on the stock. The market is pretty illiquid for Aegon options and the bid asked spreads are very wide. When I run the January 2012 $5 put options though my trusty calculator, I get a fair value of $0.50. The current spread is $0.25 bid and $0.90 asked. I would put in an order to sell the puts at $0.60 and then monitor it for a few weeks to see if you can get your position filled and back into the stock.
Buying European financials right now goes against the conventional wisdom, but it does seem in line with Sir John Templeton's advice to buy at the point of maximum pessimism.