Is Now The Time To Invest In Prudential plc, Aviva plc And Chesnara plc?

Stock market turmoil could have uncovered value in Prudential plc (LON: PRU), Aviva plc (LON: AV) and Chesnara (LON: CSN)

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Are there any bargains in the insurance sector? Today I’m looking at Prudential (LSE: PRU), Aviva (LSE: AV) and Chesnara (LSE: CSN).

Are these firms cheap?

If we look at a few valuation indicators, we might conclude that these three firms are reasonably priced — we *might*. However, I’m cautious about Prudential, Aviva and Chesnara, but more about that later.

Compared to the FTSE 100‘s price-to-earnings rating (PER) of around 17.5 and its dividend yield of 3.8% or so, the valuation indicators for these three firms ostensibly stack up pretty well:

Should you invest £1,000 in BP right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BP made the list?

See the 6 stocks

 

Recent share price

Forward PER

Forward Dividend Yield

Times forward earnings cover dividend

Prudential

1497p

12.4

2.9%

2.8

Aviva

464p

9.2

5.3%

2

Chesnara

332p

16

5.9%

1

Those yields look tempting and the cost in PER terms seems reasonable, but I’m still not rushing to buy any of these firms’ shares.

City analysts following these three reckon earnings will grow in 2016 by around 9% for Prudential, 11% for Aviva, and they will decline by 14% for Chesnara. So two of the three offers forward growth, too. Surely, that’s attractive. Not to me.

Trading well, but…

All three firms offer positive-sounding recent trading updates and outlook statements. However, the ‘problem’ with insurance-based operators is that their activities have a high level of cyclicality. As well as underwriting profits and fund management profits, which are cyclical in themselves, Prudential, Aviva and Chesnara also earn high proportions of their returns from investments. When the economy tanks, the profits and share prices of firms in the insurance sector can behave with even greater extremes than other financials, such as the banks.

My pick of the bunch

That said, Prudential’s growth since the financial crisis has excelled its peers here, and the shares delivered the firm’s investors a gain of around 430% since early 2009. However, the share price displayed some aggressive volatility recently, which underlines my point about cyclicality in the sector. Speculation that macro-economic growth could soon hit the skids is what probably drove the summer market wobbles. True to form, the cyclicals led the charge south.

We currently have what we could describe as a maturing economic cycle, and that’s not the best time to be in cyclical firms such as Prudential, Aviva and Chesnara, I’d argue. There could be further investor total returns to come, but there’s also a lot of risk of profit and share-price reversal.

With the cyclicals, share prices can behave oddly, too. Perhaps staying flat or declining as profits rise, due to things such as valuation-compression and other speculative effects. The market as a whole is always trying to anticipate what will happen next in the economic environment, and nowhere is such agonising more apparent than in the performance of the cyclical firms’ share prices.

Should you invest £1,000 in BP right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BP made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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