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Why Citi just slapped a buy rating on QBE Insurance Group Ltd (ASX:QBE) shares

Beaten-down stocks are cheap for good reason and often turn out to be value traps. But the share price of perennial underperformer QBE Insurance Group Ltd (ASX: QBE) may have fallen to a point where it is getting too cheap to ignore.

It won’t take much to trigger a rally in the share price even as concerns linger over management’s ability to turnaround the business.

That’s the view of Citigroup, which upgraded the stock to “buy” from “neutral” as the broker sees short-term upside potential even as it took a cautious view of QBE’s pace of recovery.

The upgrade is a rare bright moment for shareholders who have seen QBE’s share price slump by more than 18% in the last 12 months, compared to the 9% rally by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).

“In our view, QBE’s share price is now at such a level that a reasonable 1H combined operating ratio (“COR”) broadly in line with our forecasts should see share price upside,” said the broker.

“With some improvement in Asia and N America likely due to business disposals, 1H likely benign for catastrophes and some premium rate rises, we see a fair chance this occurs.”

This rather upbeat assessment was enough to spark a 0.7% jump in the stock to $9.92 in late afternoon trade when the broader market is up a modest 0.3%.

There’s plenty of room left for the stock to climb even if you factored in little progress by management to lift profitability in the group over the near-term. Citigroup has a price target of $11.20 on the stock and that’s on top of its 5% yield forecast yield for FY19!

“At the moment we see this as potentially just a shorter-term opportunity as we still believe the pace of profit improvement is likely to be slow initially,” added Citigroup.

“However, our analysis examining the granularity of QBE’s plans gives us a little more confidence in our revised forecasts for FY19E and beyond.”

What this means is that Citigroup’s share price target would be a lot higher if QBE can execute on its longer-term plan.

The broker is right to hold-off factoring in any real success given management’s poor track record.

But if QBE can deliver a COR or around 93.4% with an insurance margin of circa 10.5% and yield of 3%, Citigroup thinks there will be “meaningful upside” to the stock.

About time if you asked me.

QBE has been left in the dust by other large cap general insurers. Insurance Australia Group Ltd (ASX: IAG) has surged 19% over the past year, while Suncorp Group Ltd (ASX: SUN) is trading 2% in the black.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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.

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