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Buy These 4 Stocks Before They Start Rising: Transocean LTD (RIG), ENSCO PLC (ESV), Noble Corporation (NE)

I reason that Tepper likes Weatherford for two reasons: 1) Weatherford can embark on its program of a focus on debt reduction, free cash flow, and return on capital and 2) at current prices given its large undervaluation (P/BV of 1x and P/S of 0.6x), the stock is attractive as atakeover candidate. Dahlman Rose considers that Weatherford’s core product lines, its global presence, and multinational tax structure would be attractive to a number of companies.

Strong Recovery = Interest Rates go up = Bullish for Insurance stocks

Appaloosa also bought Metlife Inc (NYSE:MET) and Hartford Financial Services Group Inc (NYSE:HIG).

Despite that Barclays’ outlook is lackluster for the life insurance sector because ROEs are likely to remain compressed due to headwinds from low interest rates and a modest economic recovery, Tepper may think that the economic recovery will continue and the market will start buying Insurance stocks considering a potential change in the interest rate scenario.

MetLife has long had one of the strongest franchises and best recognized brands in the life insurance business. It is a big positive that the company received approval by the Federal Reserve and the FDIC to deregister as a bank holding company. This follows the company’s completed sale of MetLife Bank N.A. to GE Capital in January 2013. Now that MET is de-banked and out from under Fed supervision, I expect MetLife to engage in a formal capital management plan that could include a common stock dividend hike and share buyback authorization.

MetLife had a strong Q4 earnings report, beating on both the top and bottom lines, reporting earnings of $1.25 per share, $0.06 better than the Capital IQ Consensus Estimate of $1.19 and revenue growth of 12.3% year/year to $18.36 billion vs the $17.33 billion consensus. Despite the weak interest rate environment, MetLife’s business still generates solid returns. Management told investors:

“Growth was driven by a 21% increase in operating earnings in the Americas and a 26% increase (34% when adjusted for the impact of foreign currency exchange rates) in the Europe, Middle East and Africa (EMEA) segment. Operating earnings in Asia were down 24% primarily due to the annual review of actuarial assumptions.”

The stock is undoubtedly undervalued. MET trades at just 0.62 times book value, compared to the P/BV range of 1.2/1 between 2008 and 2010. Moreover, the stock has a forward price/earnings ratio of only about 7x.

In the case of Hartford Financial, the real story is its new capital management plan that includes a $500 million repurchase of common shares and a $1.0 billion debt reduction. While some investors may have been looking for more share repurchases, I believe more will be coming as the company’s run-off annuity business rolls off the balance sheet.

Despite trading close to a 52-week high, Hartford remains a compelling value play based on a book value basis. Similar to MetLife, this company should be able to move back to valuations seen in 2010 close to 0.75x book value, a big improvement from the current 0.44x book value.

Overall Conclusion

As Tepper explained in one of his latest appearances in CNBC, he likes to anticipate what the market will do. That is why he has been investing in insurance stocks: as the economy recovers, investors will bet that interest rates will rise which could benefit strong but inexpensive insurers like MetLife. In addition, he is playing the energy boom by betting on several big oil & gas companies. I appreciate you read the article and hope you could get a quick but solid understanding on how a great investor like tepper thinks.

The article Buy These 4 Stocks Before They Start Rising originally appeared on Fool.com and is written by Laura Paur.

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