The share price of Suncorp Group Ltd (ASX: SUN) is retreating from last week’s one-year high as its peer QBE Insurance Group Ltd (ASX: QBE) is taking over the spotlight with a strong rally in lunchtime trade.
The rotation could be explained by a bout of bargain hunting and profit taking. While Suncorp is suffering a 0.5% drop to $14.57 as QBE surged 2.2% to $9.76, the former is still up over 5% this calendar year when QBE is 9% in the hole.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) is up 2.4% since January and the diverging performance of the two insurers hasn’t gone unnoticed by Deutsche Bank either.
The broker thinks investors should tap on the share price brakes for Suncorp as it downgraded the stock to “hold” from “buy” even though it acknowledges a potential positive catalyst for the stock.
“We have remained consistently upbeat on SUN’s outlook since our initiation at the start of last year,” said the broker who has a price target of $14.50 on the stock.
“However, the stock has recently begun trading above our fundamental valuation. As a result, despite the clear short-term upside from the potential sale of the life assets, we downgrade the stock to ‘Hold’.”
On the other hand, the perennial underachiever QBE has just gotten a little more attractive in the eyes of Deutsche’s analysts.
The broker has upgraded the stock to “hold” from “sell” as the stock is currently trading below what it considers fair value.
“Our concerns over the group’s operational complexity and underwhelming ROE [return on equity] remain intact,” said Deutsche, which has a price target of $10.00 on QBE.
“However, since our downgrade at the August results last year the company has exited its problem LATAM assets, replaced its CEO, its CFO (twice) and is in the process of refocusing and simplifying its operations.”
It doesn’t sound like QBE is about to become a screaming buy anytime soon despite its undemanding valuation, and the fact is there aren’t any opportunities in the large-cap insurance space in my opinion.
I like Insurance Australia Group Ltd (ASX: IAG) but even that stock has run a little too hard as it has gained over 17% in 2018 to trade near a record high.
Its recent sale of three of its Asian assets will bolster its balance sheet, which could give management the flexibility to undertake a capital return (one of the drivers of the share price rally), but I rather it uses the excess cash to buy growth.
At least the good prices it received for the divestments bode well for Suncorp as it looks to offload its life insurance business.
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Motley Fool contributor Brendon Lau owns shares of Insurance Australia Group Limited. The Motley Fool Australia owns shares of Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.