ACGL - Arch Capital Group: Positive Momentum And Earnings Trends

Summary

• Insurance stocks have notched all-time highs.
• One high-momentum name is a favorite among sell side analysts, and it recently replaced Twitter in the S&P 500.
• I see big earnings growth ahead for Arch Capital.

Insurance stocks have broken out to all-time highs. The group’s relative strength to the broad market remains impressive after a year in which low-duration, high-cash-flow firms were winners.

One stock, recently added to the S&P 500, features big EPS growth ahead while its chart is among the best you’ll find on the street. But are shares of Arch Capital (ACGL) still a buy? Let’s take a look.

Insurance Reigns Supreme

According to Bank of America Global Research, originating in the wake of 2001's 9/11 terrorist attack, Arch Capital Group was founded with an aim to address the liability crisis originating out of severe underwriting losses in the 1997- 2001 period. The company has pivoted its strategy several times - property-catastrophe, mortgage insurance, etc. - as market conditions have warranted capital deployment elsewhere, and the strategy realignments have contributed to a best-in-class pace of compounding tangible book value.

The Bermuda-based $23.6 billion market cap Insurance industry company within the Financials sector trades at a near-market 20.4 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal .

This past weekend, Goldman Sachs released a list of 50 top return-on-equity picks for the year, and among them was Arch. That positive news comes after the firm announced a $1 billion share buyback program in December. Finally, back in October, ACGL rallied 7% on news it would replace Twitter in the S&P 500.

On valuation , analysts at BofA see earnings having risen impressively in 2022 after 2021’s massive jump. Operating per-share profits are then seen as re-accelerating this year before stabilizing by 2024. The Bloomberg consensus forecast is not quite as upbeat as what BofA projects, though.

With big earnings growth and a reasonable P/E today, the future earnings multiples look attractive but don’t expect dividends to be paid anytime soon. Overall, with a forward PEG ratio under 1, the stock appears to be a solid growth name in a value sector.

Arch Capital: Earnings, Valuation, Dividend Yield Forecasts

Looking ahead, corporate event data from Wall Street Horizon shows a busy calendar. First, ACGL has a confirmed Q4 2022 earnings date of Monday, February 13 after market close with a conference call the following morning. You can listen live here . The management team is then expected to speak at a trio of industry conferences from February 15 through March 8 – each of those events could bring about volatility in the stock prices should news about the sector or company itself be detailed.

Corporate Event Calendar

The Technical Take

You don’t see many charts like this right now. ACGL has been in rally mode after notching an October low just above $40. After a massive 50%-plus rally in just a handful of weeks, is the stock stretched? Perhaps, but what I like about the chart below is that shares are simply consolidating near all-time highs, not pulling back hard.

Also take a look at a bullish breakaway gap that took place in late October around the SPX-replacement news. That should imply that there will be buyers on a pullback to previous resistance in the upper $40s and low $50s. Given that ACGL is more than 20% above its 200-day moving average, taking profits here is prudent, but I would be a buyer should the stock fill the gap near $52.

ACGL: Breakaway Gap, Consolidating Near Highs

The Bottom Line

I say keep on the Arch Capital momentum train. It’s a market leader and is not extremely expensive given impressive future earnings growth.

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