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Should you buy Suncorp?

In the past few months, investors have flocked into Suncorp (ASX: SUN) shares hoping that the company’s recent profits can be extended throughout the full year, but has the market gone too far?

After the GFC, Suncorp shares hit a rough patch and when other smaller financial institutions like Bendigo and Adelaide Bank (ASX: BEN) were getting taken over or joining with their peers, Suncorp was left to fend for itself. Since its highs of around $22 back in 2007, the company has been clawing down “bad bank” debt and struggling through many natural weather events which triggered large insurance payouts.

Since over 65% of revenue comes through the companies popular insurance names like GIO, AAMI, APIA, Suncorp, Vero and Shannons, benign weather conditions have led to a huge spike in first half profits. For the half year ended 31 December 2012, NPAT rose 47.6% to $574 million and allowed the company to pay down its debt associated with its “bad bank”.

This month Suncorp sold approximately $1.6 billion of debt to Goldman Sachs (NYSE: GS). The debt was once $17.5 billion of commercial real-estate loans and is now all but gone. The elimination of the entire bad bank portfolio is now predicted to result in a net loss of between $470 million and $490 million in the second half of the current fiscal year.

The eradication and absorption of the last of the debt is a good thing for long term investors, but for those looking to get on board for a quick gain might be unpleasantly surprised when the full year results are released. With a current P/E of 22, it seems investors are hoping for big things in the upcoming annual report.

Foolish takeaway

Investing with a long term strategy enables investors to mitigate losses and focus on good business models and the leadership of management. Trying to predict short-term price fluctuations is impossible, but in the last three years Suncorp has returned an average of 19.4%, whilst competitor Insurance Australia Group (ASX: IAG) has also returned a similar amount.

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Motley Fool contributor Owen Raszkiewicz does not own shares in any of the companies mentioned in this article.

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