Created in the 1950s, the Allstate (NYSE:ALL) slogan, “You’re in good hands,” arguably ranks among the most memorable. However, thanks to the Federal Reserve and its publicly-broadcasted priority to curb inflation, the property and casualty insurance space should prove incredibly relevant and viable, if only because of the captive audience phenomenon. I am bullish on ALL stock.
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June Jobs Report Represents a Godsend for ALL Stock
At first glance, the official June jobs report might seem like a headwind for ALL stock and related boring enterprises. After all, the labor market created 209,000 new jobs last month, below economists’ forecast calling for 240,000 jobs added. What’s more, one day earlier, the ADP labor market data indicated that private sector jobs soared to 497,000 last month, well above the estimate of 220,000 jobs.
Therefore, June’s official labor market print seems problematic for ALL stock. With inflation appearing to go in the right direction (that is, down), the Fed might not do anything about the benchmark interest rate. However, such a notion is probably incorrect, meaning that the labor data is actually a godsend for Allstate.
For one thing, the unemployment rate dipped down slightly to 3.6% from 3.7% in May. More worrying (from a monetary policy perspective) is that average hourly earnings increased by 0.4% in June. That was also the same pace of wage growth seen in May after the government revised the data. Additionally, compared to June of one year ago, wages increased by 4.4%.
Taken as a whole, the economy “suffers” from a condition where more dollars are chasing after fewer goods. While nations generally seek a robust labor force, the Fed needs to substantively tame inflation. It’s not going to do that with the labor market constantly expanding.
The Fed to the ‘Rescue’
Although the Fed has lately let go of the hawkish gas pedal as it seeks to spark a minimally-punitive disinflationary trend, the current sentiment among traders implies that the central bank will likely raise rates during the next Federal Open Market Committing (FOMC) meeting later this month. If so, the return of a hawkish strategy may bode poorly for risk-on assets.
It’s probably not a coincidence that the cryptocurrency sector was relatively muted over the past week following a big burst of bullish activity in the second half of June. Also, the S&P 500 (SPX) slipped almost 1% last week. Put another way, the Fed’s effort to rescue the economy might not pan out for many, if not most, publicly-traded enterprises.
However, for ALL stock, higher borrowing costs may help invigorate the troubled investment.
Since the start of this year, ALL stock lost nearly 21% of its value. Over the trailing one-year period, it slipped almost 17%. However, with disinflationary winds likely to materialize, courtesy of the Fed, Allstate deserves consideration.
Fundamentally, ALL stock benefits from a captive audience. Unless the economy falls into an utterly putrid state, most consumers need property and casualty insurance. Cynically, the cost of encountering an unfortunate incident without coverage could be crippling. Therefore, barring a true apocalypse, Allstate should court demand.
Allstate’s a Bargain, Too
While the aforementioned red ink in ALL stock may be distracting, rising relevance from a possibly emerging disinflationary environment should boost the narrative. More importantly, on an objective basis, Allstate offers a bargain to prospective investors.
Most prominently, the market prices ALL stock at a trailing-12-month sales multiple of 0.55. In contrast, the price-to-sales ratio for the underlying industry stands at 1.21. Again, that’s for the property and casualty subsegment. However, even looking at the cheapest insurance subsegment – life insurance – the average price-to-sales ratio is 0.83 times.
Either way, Allstate stock offers a significant discount. Moreover, ALL stock trades at a price-to-book ratio of 1.83 times. Here, too, the underlying industry carries a higher price-to-book value of 2.20 times.
Is Allstate Stock a Buy, According to Analysts?
Turning to Wall Street, ALL stock has a Strong Buy consensus rating based on six Buys, five Holds, and one Sell rating. The average ALL stock price target is $128.55, implying 20.4% upside potential.
The Takeaway
With the Fed increasingly likely to take the kiddie gloves off in its battle with inflation, few enterprises will benefit. However, an exception can be made for the insurance industry due to critical demand. Further, ALL stock makes a compelling case because it’s undervalued relative to its rivals.
