We recently compiled a list of the 7 Mid Cap Stocks with Low PE Ratios. In this article, we are going to take a look at where Lincoln National Corporation (NYSE:LNC) stands against the other mid cap stocks with low PE ratios.
The stock market has experienced a surge in activity recently, driven by positive investor sentiment and key decisions from the Federal Reserve. Even though the month of September began on a volatile note, with stocks facing multiple hurdles, optimism ultimately prevailed as markets ended the quarter on a high note. Throughout this period, the Federal Reserve’s policy moves played a crucial role in shaping market dynamics. By implementing interest rate cuts, the Fed provided much-needed relief to the markets, contributing to gains in major indices. Despite the ups and downs, investors managed to navigate the turbulent waters and ended up with a more positive outlook.
The rise in investor optimism can be attributed to various factors, including strong corporate earnings, positive economic indicators, and a general belief that the Fed will maintain its accommodative stance. This period has been marked by record gains in the equity market, leaving investors hopeful for continued growth. However, despite the bullish sentiment, caution still lingers as the market enters the historically volatile month of October. Concerns over potential economic slowdowns, geopolitical tensions, and unpredictable interest rate policies remain in focus.
Amidst these market movements, interest rate fluctuations have become a critical point of discussion. The Federal Reserve’s recent rate cuts were intended to support economic activity, yet the comments from Fed officials suggest that future rate decisions are not set in stone. As the Fed Chair mentioned in a recent statement, the central bank is not in a hurry to implement further rate cuts and will remain data-dependent in its approach. This cautious stance has left investors closely monitoring economic indicators and Fed communications for signs of the central bank’s next moves.
In parallel with interest rate dynamics, the short-term funding market has also shown signs of stress. The Secured Overnight Financing Rate (SOFR), which measures the cost of borrowing cash overnight collateralized by Treasury securities, saw a notable increase. This rise in short-term borrowing costs reflects tighter liquidity conditions, especially at the end of the month and quarter. While such fluctuations are not uncommon during these periods, the recent surge has raised some concerns about the availability of cash in the market and potential funding pressures. The market’s response to these developments has been mixed, with some strategists suggesting it might be a temporary phenomenon, while others believe it could signal more persistent challenges in the funding markets.
Another critical indicator of market liquidity, the repo rates, also experienced upward pressure. This spike in repo rates can be a sign of scarce cash for financial institutions, and if left unaddressed, it could create further uncertainty in the markets. Analysts have pointed out that while short-term borrowing costs tend to rise at quarter-ends due to balance sheet adjustments by financial institutions, the magnitude of this increase was unexpected, indicating that the market’s capacity to provide liquidity might be more constrained than initially thought.
Moving forward, market participants will be paying close attention to economic data releases and the Fed’s future guidance on interest rates. With labor market data and inflation reports due later this month, any surprises could lead to heightened market volatility. Moreover, given October’s reputation for dramatic market swings, investors are likely to adopt a more cautious approach, balancing between optimism for continued growth and concern over potential setbacks.
A recent report by Reuters highlighted that despite the current funding pressures, the Federal Reserve remains confident in its ability to manage liquidity. The introduction of facilities like the Standing Repo Facility (SRF) aims to ensure that banks and other financial institutions have access to cash when needed, reducing the likelihood of market disruptions. While Monday’s surge in SRF activity was notable, subsequent declines suggest that these pressures might be temporary. Still, the Fed’s ongoing efforts to monitor and respond to changes in the repo and short-term funding markets will be crucial for maintaining stability in the months ahead.
As the market navigates these uncertain times, many investors are looking for opportunities in mid-cap stocks that offer strong growth potential at attractive valuations. One key indicator that has drawn interest is the price-to-earnings (P/E) ratio, which can provide insights into whether a stock is overvalued or undervalued relative to its earnings. While low PE ratios are attractive, they could also indicate value traps, therefore investors should conduct their own due diligence before initiating positions.
Our Methodology
For this article, we used the Finviz screener and identified 20 stocks with market cap of less than $10 billion and having forward price to earnings (P/E) ratio of less than 5 as of October 2. We narrowed down our list to 7 stocks and ranked them in ascending order of the P/E ratio. We also examined Insider Monkey’s data on 912 hedge funds as of Q2 2024 and mention the hedge funds holdings in each stock.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An insurance executive conferring with clients in a modern office, discussing policies.
Lincoln National Corporation (NYSE:LNC)
Forward P/E ratio as of October 2: 3.22
Number of Hedge Fund Holders: 37
Lincoln National Corporation (NYSE:LNC) is a diversified insurance and retirement company operating through its four primary segments: Life Insurance, Annuities, Group Protection, and Retirement Plan Services. The company’s competitive position in these areas, coupled with its disciplined capital management strategy, makes it a compelling pick among mid-cap stocks with low P/E ratios. As of October 2, Lincoln National Corporation (NYSE:LNC) has a forward P/E ratio of 3.22, making it an attractive option for value-focused investors. Furthermore, the stock saw an increase in hedge fund holders, rising to 37 in Q2 2024 from 32 in the previous quarter, indicating growing institutional interest.
During the second quarter of 2024, Lincoln National Corporation (NYSE:LNC) exceeded expectations by reporting an impressive EPS of $5.21, significantly higher than the anticipated $1.78. This strong performance was driven by robust growth in its Annuities and Group Protection segments. The Annuities business recorded its highest earnings quarter in two years, with total annuity sales reaching $3.8 billion, up 48% from the prior year. This growth was supported by a well-balanced product mix, with 70% of sales in spread and spread-like products. Additionally, fixed annuity sales more than doubled year-over-year, highlighting the effectiveness of the company’s strategy to capture market share in this segment.
Lincoln National Corporation (NYSE:LNC) Group Protection segment also showed strength, with earnings in line with the previous year’s record quarter and a margin of 8.2%. Sales growth was robust, increasing by 68% compared to the same quarter last year, driven by new business from existing customers and a focus on supplemental health products. This momentum reflects Lincoln’s successful execution of its strategy to diversify its product offerings and expand into new market segments.
The company also achieved an estimated RBC ratio of over 420%, bolstering its financial stability. This strong capital position, combined with Lincoln’s efforts to optimize its operating model and reduce expenses, positions it well for future growth and profitability. Overall, Lincoln National Corporation (NYSE:LNC) solid financial performance, strategic business realignment, and strong fundamentals justify its inclusion in the list of mid-cap stocks with low P/E ratios.
Miller Value Deep Value Strategy stated the following regarding Lincoln National Corporation (NYSE:LNC) in its first quarter 2024 investor letter:
“During the quarter, we initiated a position in Lincoln National Corporation (NYSE:LNC). Lincoln Financial is a 120-year-old financial services company that provides financial protection and security to its customers through annuities, life insurance, group protection and retirement plan services. Over the past two years, the company has seen significant headwinds in its Life Insurance segment and profit challenges across the business largely due to the Covid outbreak. New senior management has indicated a greater focus on strengthening the balance sheet, focusing on more capital-efficient new business, and improving long-term free cash flow generation. Over the past year, the company has conducted a series of transactions that have improved their balance sheet and enhanced the Firm’s capital ratios. Management is undertaking cost reduction actions and the headwinds in their life segment appear poised to turn to tailwinds over the next couple of years and potentially allow the segment to return to normalized profitability. In addition, the company’s new Head of Workplace Solutions whopreviously at MetLife is focused on improving the company’s Group and Retirement business, accelerating organic growth through new product offerings, and narrowing the segment margins with peers. If the company’s plans are executed well, Lincoln’s operating income could grow double digits over the next couple of years, improving company ROE (return on equity) and free cash flow conversion.
Lincoln is down 60%+ from its 2-year high, at an attractive 50% discount to book value and 30%+ normalized earnings yield. Achieving long-term free cash flow conversion targets would support annual free cash flow in excess of $1B. With a forward price-to-earnings (P/E) multiple close to four times, every one multiple point improvement generates approximately 25% in share price returns (significantly higher than the S&P 500 today which would be closer to 5% for each multiple point improvement and for the top five market caps, closer to 3%). Over the next 3-5 years, LNC returning to normalized earnings and valuation expanding back towards the peer group 20-year P/E average of 9.6x and 1.2x book value, would support upside potential near three times its current price levels.”
Overall LNC ranks 2nd on our list of the mid cap stocks with low PE ratios. While we acknowledge the potential of LNC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LNC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.