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Why Progressive Corp (PGR) Stock is a Compelling Investment Case

On July 8, 2020, Giverny Capital released its Q2 2020 Investor Letter, a copy of which you can download here. The Fund returned 19.64% for the second quarter of 2020. Meanwhile, the benchmark S&P 500 Index gained 20.54%. You should check out Giverny Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the said letter, Giverny Capital highlighted a few stocks and Progressive Corp (NYSE:PGR) is one of them. Progressive Corp (NYSE:PGR) is a car insurance company. Year-to-date, Progressive Corp (NYSE:PGR) stock gained 17.5% and on July 14th it had a closing price of $84.50. Here is what Giverny Capital said:

“In auto insurance, the story should be similar. It is not uncommon to underwrite auto policies at break even and make money investing the float, which is the cash customers pay upfront that the insurer will pay out in claims in future years. Progressive’s skill at underwriting is such that it typically earns industry leading profit margins of 7% to 9% and generates a relatively small portion of its total income from investing. In a world where interest rates trend to zero and the stock market no longer generates doubledigit returns, all the mediocre underwriters who depend on investment income face a reckoning. They have not invested in the technology or analytical expertise to earn a profit writing insurance, much less a direct sales channel to reduce expenses. They can no longer park the bulk of their float in Treasuries that yield 2.5% or 3% and expect to survive.

We think the recent collapse in driving miles may prove to be the lull before the storm. If people fly less as the COVID-19 era stretches on, they may drive more. If they drive more, there will be more accidents and current insurance rates may prove inadequate. Simultaneously, insurers face deterioration of their investment income, the source of most of their earnings. They will need to either raise rates or tolerate declining earnings and lower returns on capital. When rates rise, consumers shop more. When they shop, they tend to find Progressive.

While we understand the argument that cars are safer than ever, all those cameras and sensors mean they’re also more expensive than ever to repair. We expect to see fewer collisions in the future, but more costly damage, keeping us confident that auto insurance will remain expensive and that Progressive’s advantages will remain meaningful to consumers.”

In Q1 2020, the number of bullish hedge fund positions on Progressive Corp (NYSE:PGR) stock increased by about 6% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with Progressive’s upside potential. Our calculations showed that Progressive Corp (NYSE:PGR) 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

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. You can subscribe to our free enewsletter below to receive our stories in your inbox:

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