Manulife Financial (MFC.TO)

It is relatively out of favour but capital markets and interest rates are good. It is a growth story with a lot of negatives already priced in. (Analysts’ target: $29.21).

(A Top Pick Oct 5/17, Down 3%) He expected we would have a rebound in interest rates and they would affect this one positively. MFC-T was getting out of its US operations and moving internationally. It went sideways. All the values are still very much there. He would stick with it.

Fundamentals are wonderful, great dividend. But stock hasn’t done much for last 2 years. Lot of trading at $24. Wouldn’t touch it, unless for the dividend. It’s liabilities are concerning. Strong support at $23.40, get out if goes below $23. Can’t call a trend until hits $25. The good story is irrelevant if the stock is not performing.

No one can explain why the shares have such a trough time appreciating. They have shifted into more wealth management. He suggests you buy another name in the space that does go up. He prefers the Canadian banks.

They announced a new focus on disclosure on their legacy portfolio and improving their efficiency ratios and becoming a leader in digital adoption. He believes this will help narrow the valuation gap. This is heap. They model a growth of 11% on earnings. (Analysts’ price target is $29.44)

He is wondering why it is where it is. SLF-T is on more of a tare than MFC-T. It has a bit to do with the mix of business. He thinks it is worth $30. Sometimes these things happen in the market. He owns it because the market is not efficient. You have to have patience.

He's disappointed because it's stalled out, because all Canadian financials have, including the banks which haven't reached new highs since January. But he thinks they will all do better. Hold for now and sell on the highs in the next rally.

It's been lagging its peers, largely because of new management since last fall. New management is putting more pressure of their troubled legacy businesses, namely long-term care in the U.S. They've been expanding aggressively in Asia. More importantly, they're looking at their cost-structure. They're aiming for an efficiency ratio under 50% by 2022, and currently at 55%. This means several billions in cost savings. Alaos, capital will be released from dispositions in the next few years. New management is modernizing this company. There could be some short-term pain, including write-offs, but current prices amount to exceptional value. (Analysts' price target: $29.46)

He sees $22.50 as key support. He wonders if there is topping action on the chart. He prefers Fairfax Financial, although it does not quite the same quality. MFC-T has been focused on their market, but prefers Sunlife (SLF-T), which is demonstrating better technical trending. He would suggest swapping MFC-T for SLF-T at current levels.

Since the Financial Crisis it has been a frustrating stock. The company has upside potential with the exposure in Asia and wealth management. Maybe with the new leadership it could break out and over to the new level releasing some capital. He still has faith in the longer term in the name, but it could be frustrating in the short term. (Analysts’ price target is $29.00)

They gave a lot of clarity on their legacy products at their Investor Day last week. They are expanding other parts of the business to drive down the impact of legacy businesses on their overall income. Their new CEO used to run Manulife Asia, which is very high growth. Their PE multiple of 9x is very low compared to Sun Life’s 12x. Their target ROE is 13% and they achieved that in the first quarter. The company’s Price to Earnings and Price to Book will rise if ROE stays this high. (Analysts’ price target is $29.65)

SU-T vs. MFC-T. As interest rates rise, this is better for insurance companies. This will cease to be the case if the central banks tighten so much that it sparks a recession. These companies get hit more during economic downturns. Insurance companies will not do as well this late in the cycle.

Buying opportunity? Never been a fan of Manulife. Always preferred Sun Life. Their announcements shake investor confidence. He stays within North America for investments. Concerned about emphasis on Asia for growth. Plus chatter about getting out of Hancock makes it a little too complicated.

He owns no insurance companies. This one has had issues amongst the bunch with their acquisition of Hancock. They inherited the issue of long term care. It has unlimited liability potential. It is the cheapest and highest grower of the insurance companies and they have the Asia division growing quickly. This could be a unique asset. This is the torquey name to own. He is interest in it. 3.5% dividend. He is looking at it.

Manulife (MFC-T) versus Sunlife (SLF-T). He owned Manulife going into the financial crisis, but became concerned about management and sold out of their holdings. When Sunlife began to fall in sympathy they bought them – focusing on the preferred shares in particular. Manulife still has some questionable assets in the US and may not know how to offload them.