Manulife Financial (MFC.TO)

He stood back and watched for the last number of years. A company is battling to deposit unlimited amounts with them at 4%.

A short report from Muddy Waters came out today. He's always liked MFC. Universal life policies and the way they were funded is what got them in trouble in 2008. He thought they'd walked away from this problem, and now he is not 100% sure they have. He needs to read this short report closely. Don't short or sell it, but he expects this to underperform for a while.

They have gotten caught up in the slowing Chinese market. At the current valuation, the stock is at a good level to buy. He would average down. He expects once there is greater certainty with trade in China there will be good upside to this blue chip stock.

A core holding. Shares haven't done much over the past two years. Rising interest rates will kick some life into insurance stocks. MFC needs to sort out its John Hancock division in the U.S. Its Asian franchise is the crown jewel, though, so as this franchise grows, so will this stock. MFC has a strong presence in Asia where insurance is not saturated like it is in North America.

Responding to a caller who argued that the company’s financials are strong and asked why it is not selling for $30. Steinberg responded that it is a mistake to evaluate this company on its own. Globally, the financial services sector is under pressure. Global banks are under pressure. European insurers are trading at single-digit multiples. For a value investor, these are opportunities to step into good companies at fairly low earnings multiples. Manulife is well-run, has a healthy level of international business, and pays a good dividend. He expects dividend growth. Rather than being frustrated with companies like this, value investors step in and buy them.

It's gone nowhere in the last year, but up 25% in the past five. Earnings growth is good. New management's focus is on wealth management and Asia. Yes, John Hancock is a legacy they continue to deal with, but MFC's operational side is doing fairly well and its Asian operations are gangbusters, showing impressive growth.

(A Top Pick Sept 28/17, Down 5%) It’s still cheap. Trades at 8.3x, with growth rate of 8%, dividend growing at 8%. Improving policyholder efficiency. Consistent performance will eventually narrow the discount. Still has $6-8 north of here. Won’t hurt you if you approach it right.

He likes trading sideways stocks, as long as you know the downside potential. He recently bought MFC off the mid-$20's bounce, and he believes it could teach the mid-high-$20's. Not a huge trade, but pays a good dividend. It could reach that peak in the winter. And it's not a high-risk play. (3.7% dividend, Analysts' price target: $30.03)

He owned it going into the financial crisis and bailed out because it was overleveraged to markets and was unhedged. After it was hurt by this, it overreacted and is now so well hedged that it cannot benefit from rising interest rates. He likes the life insurance industry and owns three companies in that space, but not this one. Among Canadian insurers, he prefers Sun Life. He thinks it is better managed, with better exposure to interest rates. He likes the international diversification of both Manulife and Sun Life, but Manulife’s biggest international diversification is via John Hancock in the US, which is troubled.

The insurance sector is trading at historical low multiples, but there is risk to rising interest rates in their annuity business. The PE is near 9 – good value. There is some Asian exposure. It should continue to be a staple in your portfolio. Yield 3.7%.

All of the insurers are trading of forward PE is 8-9 times. This is the favoured one of the group because of the Asian exposure. The problem has been the US business. Any of the variable annuity businesses are challenged. He believes in their ability to continue to deliver.

This is one of the few Canadian companies he owns. He likes it. He likes the potential of the business, and the leverage to higher rates. The stock rose in expectation of higher rates and dropped off when the main increases were postponed. The company struggled with its US business, but now the company is stronger, the dividend is fine and will gradually increase. Eventually the Asian expansion will pay off and the stock will probably move to the low $30’s, which is where many people have set a target price. He would nibble away at it at this price. He would buy a lot more at $20 and would sell some at $32.

What's the effect of interest rates rising is a good thing for insurance companies? Good, because higher rates boost the bottom line quickly. Also, the hedging costs decrease.

From a technical level, fell below the 200-day average earlier this year and has stayed there. Pretty good dividend, which should grow. He owns Sun Life, which has a more diversified base. You don’t want to buy insurers simply for interest rate movements, because they may not happen.

MFC-T vs. BNS-T. He would say buy them both. BNS-T is building up their wealth management business after building Latin American banking. MFC-T has lagged quite a bit including lagging SLF-T. MFC-T has bounced around. They continue to grow outside of Canada and rising rates benefit them.