In this morning’s half-year report, the chief executive of life and general insurance firm Legal & General Group (LSE: LGEN), Nigel Wilson, told us that the firm has “tremendous momentum” in its business.
Operational and share price momentum
The figures are good. Highlights include a return on equity nudging 27%, up almost 30% compared to the equivalent period last year, and earnings per share blasting up by 41%. The directors marked the company’s success by moving the interim dividend up 7.5%.
As well as operational momentum, the share price has momentum too. Since last summer’s dip, the shares now change hands around 60% higher and they are up around 840% since the 2009 lows. But it’s justified. The dividend has grown some 88% over the last four years alone.
I’m attracted to hop onto this operational and share price momentum. However, let me make it clear that I’d never buy and forget a holding in Legal & General because the business is cyclical. I fear a plunge in profits and the share price at some point down the road, although it’s hard to see such a collapse coming. For me, the solution would be to buy the firm’s shares with the idea of selling fast if events, or the share price, turn against me.
Such tactics could work out well with a big-cap like Legal and General because the shares have plenty of liquidity, making it easy to move in and out. On top of that, a deteriorating outlook can take longer to work into share price movements of larger firms, which gives investors more time to react.
You only need to look at a chart of Legal & General’s share price movements to see what the perception of a deteriorating macroeconomic outlook can do to the shares of a cyclical firm. Shareholders in the firm suffered a stomach-churning lurch down during 2015 and 2016, although the underlying performance of the business remained steady.
Mr Wilson reckons the firm’s business model has “proven to be resilient to political, economic and regulatory uncertainties.” But he insists the directors are not being complacent and they recognise “some structural weaknesses in the UK economy.” Nevertheless, they see opportunities ahead to deliver more growth, so I’ve turned bullish but with my hand on the ejector lever.
I think a similar approach could work well with general insurance provider Hastings Group Holdings (LSE: HSTG), which also reported half-year results today. The firm’s business and its share price show positive momentum that looks similar to Legal & General’s, and the company claims to be “one of the fastest growing general insurance providers to the UK market.”
Again, the figures are great with revenue up 22% compared to a year ago and adjusted operating profit elevating 22%. The firm is gaining market share and the directors expressed their confidence in the outlook by pushing up the interim dividend 24%.
Chief executive Gary Hoffman is optimistic, saying “we are well on course to deliver on our ambitious 2019 targets and continue our strong momentum into the second half.”
I can’t argue with the progress these two firms are making right now and I think they deserve your further attention. However, I recommend that you remain vigilant if you do take the plunge and buy some of the firms’ shares.
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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.