Over the past six months, Enact Holdings has been a great trade, beating the S&P 500 by 12.4%. Its stock price has climbed to $41.83, representing a healthy 17.7% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Enact Holdings, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Enact Holdings Not Exciting?
Despite the momentum, we're sitting this one out for now. Here are three reasons there are better opportunities than ACT and a stock we'd rather own.
1. Net Premiums Earned Hit a Plateau
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.
Enact Holdings’s net premiums earned was flat over the last five years, much worse than the broader insurance industry. This shows that policy underwriting underperformed its other business lines.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Enact Holdings’s revenue to rise by 1.5%, a slight deceleration versus its 3.6% annualized growth for the past two years. This projection is underwhelming and suggests its products and services will face some demand challenges.
3. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Enact Holdings’s full-year EPS grew at an unimpressive 7.2% compounded annual growth rate over the last four years, worse than the broader insurance sector.
Final Judgment
Enact Holdings’s business quality ultimately falls short of our standards. With its shares topping the market in recent months, the stock trades at 1× forward P/B (or $41.83 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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