Brighthouse Financial (BHF) Has Fallen 32% in Last One Year, Underperforms Market

If you are looking for the best ideas for your portfolio you may want to consider some of Greenlight Capital’s top stock picks. Greenlight Capital, an investment management firm, is bullish on Brighthouse Financial Inc. (NASDAQ:BHF) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Brighthouse Financial Inc. (NASDAQ:BHF) stock. Brighthouse Financial Inc. (NASDAQ:BHF) is a life insurance company.

On July 25, 2019, Greenlight Capital had released its Q2 2019 investor letter. Brighthouse Financial Inc. (NASDAQ:BHF) stock has posted a return of -32.2% in the trailing one year period, underperforming the S&P 500 Index which returned 13.3% in the same period. This suggests that the investment firm was wrong in its decision. On a year-to-date basis, Brighthouse Financial Inc. (NASDAQ:BHF) stock has fallen by 32.6%.

In Q2 2019 investor letter, Greenlight Capital said the fund posted a return of 5.8% in the second quarter of 2019, outperforming the S&P 500 Index which returned 4.30% in the same period. Let’s take a look at comments made by Greenlight Capital about Brighthouse Financial Inc. (NASDAQ:BHF) stock in the Q2 2019 investor letter.

“The most obvious example is Brighthouse Financial (BHF), which we wrote about extensively last quarter. In response to our letter, one investor asked, “What’s the bear case?” At the time we replied that the story was complicated to follow. But late in the quarter, we got some clarification when two banks, Goldman Sachs and Credit Suisse, published lengthy negative reports on the same day.

These reports contain several key flaws. First, both reports value BHF’s main business – variable annuities – based on the run-off value of the existing book of business. However, BHF is not in run-off; the company sells nearly $2 billion of new annuities per quarter. The bearish reports each treated the business as if it were not a going concern.

Second, both analysts significantly overestimate BHF’s sensitivity to declines in interest rates. The Goldman Sachs analyst sees the potential for a nearly $1 billion hit from today’s lower rates, yet this is contrary to BHF disclosures. In December (amidst a dire market backdrop), management noted that a loss of $1.2 billion would require a “correlated stress” of both a 25% decline in equity markets and a 100 basis point move lower in the 10-year Treasury.

Most importantly, neither report appropriately accounts for the lifecycle of variable annuities, particularly with respect to capital requirements. As with other life insurance products, when an insurer sells a new variable annuity, it must hold a prescribed amount of assets and capital to ensure it can meet its obligations over the life of the contract. As the annuity “seasons” and approaches its earliest payout dates, capital requirements steadily rise because the shorter timeline to payout means fewer years for the insurer to earn interest on its asset base. Eventually capital requirements peak and excess capital starts to be released back to the insurer. While a mature book of business regularly releases capital, a younger book requires an ongoing capital build.

BHF has a younger book of business than its peers. The result is that its book currently throws off less free cash flow than others. In most cases, the market pays a higher multiple for businesses that are in their investment stage and a lower multiple for businesses that are in their return of capital stage. However, the BHF bears ignore this dynamic and argue the opposite: the lower near-term cash flows should get a lower multiple. There is no justification for this view, which is the bedrock of their absurdly low price targets.

Either way, over the next few years BHF’s need to build capital will peak and the headwind will turn into a tailwind. It isn’t hard to envision free cash flow doubling over the next few years as the variable annuity book matures, eventually reaching $1 billion per year or more. Even now, BHF has plans to buy back $1.5 billion of stock by the end of 2021. At today’s prices, that is approximately 1% of shares outstanding per month. Today, the company’s market capitalization is just over $4 billion. We’ve digested the bear case and we continue to think that BHF is deeply undervalued at about 30% of book value and 4x earnings.”

Last month, we published an article revealing Greenlight Capital’s bullish investment thesis on Brighthouse Financial Inc. (NASDAQ:BHF) stock in its Q2 2020 investor letter. This suggests that the investment firm has been bullish for a long time on Brighthouse Financial Inc. (NASDAQ:BHF).

In Q2 2020, the number of bullish hedge fund positions on Brighthouse Financial Inc. (NASDAQ:BHF) stock increased by about 36% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with Brighthouse Financial’s growth potential. Our calculations showed that Brighthouse Financial Inc. (NASDAQ:BHF) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

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Disclosure: None. This article is originally published at Insider Monkey.