2023-07-10 07:30:00 ET
Summary
- Jackson Financial investors didn't hold the line in May as they ran after the company's Q1 earnings release.
- Dip buyers have returned, likely attracted to JXN's forward dividend yield of more than 8%. I assessed that buyers were unfazed by the recent rise in Treasury yields.
- Therefore, JXN's peak pessimism has likely been reflected, with income investors helping to defend the recent selloff.
- Value investors could also be expected to return more aggressively if Jackson Financial could provide a more constructive outlook at its upcoming Q2 earnings release in August.
- Investors anticipating that the worst in JXN is over should consider adding more positions at the current levels.
Leading annuities player Jackson Financial Inc. ( JXN ) stock has disappointed me as my thesis of a mean-reversion play hasn't panned out since my previous update in April.
I assessed that its valuation was already highly attractive, with a dividend yield that didn't seem to be under imminent threat of a cut. The company's earnings update in May corroborated my assessment that the company's liquidity remains highly robust. Management updated that it held over $1.5B in "highly liquid securities" at the end of Q1. It also includes the nearly $600M raised from a preferred stock offering earlier in Q1, slated to pay off a debt maturity in November 2023.
Despite that, I believe it's important to acknowledge the downward de-rating by the market in JXN instead of trying to heap blame that the market was wrong.
I waited for a couple of months since its earnings release before returning with an update, as I wanted to glean whether dip buyers could return after May's massive decline. While JXN's buying sentiments have consolidated over the past two months, dip buyers don't seem convinced to return aggressively over JXN's battering.
Still, I'm inclined to think that JXN's risk/reward is increasingly skewed toward the upside at the current juncture. The 2Y Treasury yield has risen recently, culminating in it re-testing its March highs. As such, I assessed that the market has likely priced in the interest rate headwinds since May, as JXN held its May lows.
In addition, the credit rate reset to 2.95%, a significant headwind in Q1, is close to its maximum rate of 3%. As such, it shouldn't substantially impact Jackson Financial's adjusted operating earnings moving ahead.
While the hedging losses on freestanding derivatives led to a significant GAAP impact in Q1, analysts' estimates suggest that it should have bottomed out, with a positive inflection from Q2 onward. As such, JXN's adjusted book value per share is also expected to bottom out in Q1, as it's projected to continue recovering through Q4.
With that in mind, dip buyers who have accumulated over the past two months, as seen in JXN's price action, could argue that the worst has likely been reflected. I discuss the critical levels that investors need to observe closely if they are considering adding more positions at the current levels.
JXN price chart (weekly) (TradingView)
I didn't glean any bear trap or false downside breakdown in JXN's May re-test. As such, it lowers the conviction buy level for investors considering whether dip buyers would be willing to support the buying sentiments.
While the consolidation over the past two months indicates that selling pressure has abated, JXN could also be mired in a range until the release of its Q2 earnings on August 9, as investors assess management's outlook.
Notwithstanding, JXN's 8.2% forward dividend yield should provide some respite and defense, even though a further upward re-rating could depend on when the market expects the Fed to pivot.
Despite that, buyers could still be encouraged to pick their spots at the current levels as they anticipate the peaking of the Fed's rate hikes. As such, I assessed that it's reasonable for buyers to anticipate that the worst in Jackson Financial's operating performance has likely been reflected in the first half.
While patience is required to allow my thesis to play out, income investors should find the current buy levels attractive to add more exposure.
Rating: Maintain Buy.
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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Jackson Financial: Nearing Peak Pessimism As Investors Fled