Insurance company Arch Capital Group is Tuesday's pick for IBD 50 Stocks To Watch. The insurance stock is forming a new base in tight trading and has clawed its way off the bottom.
Arch Capital offers property and casualty, specialty, mortgage and reinsurance to customers in North America, Europe, Bermuda and Australia.
Its products include property, liability, marine, aviation and space, agriculture, accident, life and health insurance. Arch's types of specialty coverage include cyber, terrorism and political risk.
The insurance company is ranked No. 5 out of 61 stocks in the property-casualty-title insurance group. The group ranks No. 62 out of the 197 IBD industry groups.
Insurance Stock Forms A New Base
The insurance stock is in a flat base with a 84.83 buy point, according to MarketSmith pattern recognition. The entry point also marks its 52-week and all-time high reached on July 27, in a volatile trading day following the company's earnings release.
Shares have traded in light volume since August, with three rising days in higher-than-average daily volume, a show of strength.
The stock sold off sharply for two days following the report, then traded sideways in tight action, forming a bullish three-weeks tight pattern. Shares fell below the 50-day moving average on Aug. 17 on their way to the bottom of the base.
The insurance stock traded lightly as it slowly climbed to trade in a 76-78 range. Shares reclaimed the 50-day line on Thursday, in slightly higher-than-average daily volume. Shares broke the 78 resistance level Monday and are on pace for a second positive day on Tuesday, although in light trading. The insurance stock's relative strength line is on the rise.
EPS Still Growing
Arch Capital reported better-than-expected Q2 earnings late on July 26. The above-views result helped mitigate a slowdown in quarterly EPS growth, to 43% from 57% and 69% in the prior two quarters.
The insurance stock's average EPS growth for the last three quarters was 56.4%, according to IBD Leaderboard.
Arch holds a three-year EPS growth rate of 66%, according to IBD Stock Checkup. Analysts project annualized EPS growth of 39% this year and 8% the next.
Revenue grew 43% over last year's quarter and has grown for four straight quarters, after several declining ones. Quarterly net premiums written grew 27.7% vs. last year. The company's reinsurance segment led the way, with nearly 47% growth over last year's quarter.
"The property and casualty environment continues to offer opportunities, as evidenced by the growth in our premiums written," according to Arch's SEC 10-Q report. Management cited inflation as a concern and is building that into its pricing and reserves.
Arch Capital Poised To Benefit
Barron's identified Arch Capital as one of four companies benefiting from strong demand for insurance and its healthy reinsurance pricing.
JMP Securities analyst Matthew Carletti says Arch capital "stands to be one of the biggest beneficiaries of a hardening P&C pricing cycle, given its depth and breadth of global distribution and underwriting expertise," according to the Barron's article. Carletti has a 90 price target on the stock.
Arch Capital's Q2 loss ratio increased to 50.3% from 47.4% in last year's quarter, showing a higher level of losses to premiums. A lower loss ratio number means higher profitability for the company.
Mutual funds own 60% of shares, with 1,862 funds owning the insurance stock in June, up from 1,777 in March and 1,656 in December. ACGL stock holds a near-perfect 98 IBD Composite Rating and a 96 EPS Rating.
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