Over the past six months, Assured Guaranty’s stock price fell to $70. Shareholders have lost 15.4% of their capital, which is disappointing considering the S&P 500 has climbed by 8.9%. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Assured Guaranty, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Assured Guaranty Will Underperform?
Despite the more favorable entry price, we’re cautious about Assured Guaranty. Here are three reasons we avoid AGO, plus one stock we’d rather own.
1. Declining Net Premiums Earned Reflect Weakness
When insurers sell policies, they protect themselves from extremely large losses or an outsized accumulation of losses with reinsurance (insurance for insurance companies). Net premiums earned are therefore gross premiums less what’s ceded to reinsurers as a risk mitigation and transfer strategy.
Assured Guaranty’s net premiums earned has declined by 3.8% annually over the last five years, much worse than the broader insurance industry. This shows that policy underwriting underperformed its other business lines.
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for Assured Guaranty, its EPS declined by more than its revenue over the last two years, dropping 17.2%. This tells us the company struggled to adjust to shrinking demand.
Final Judgment
We see the value of companies helping consumers, but in the case of Assured Guaranty, we’re out. After the recent drawdown, the stock trades at 0.5× forward P/B (or $70 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d recommend looking at a dominant aerospace business that has perfected its M&A strategy.
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