Enact Holdings has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 17.3% to $47.26 per share while the index has gained 16.9%.
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Why Do We Think Enact Holdings Will Underperform?
We don’t have much confidence in Enact Holdings. Here are three reasons why ACT doesn’t excite us, plus one stock we’d rather own.
1. Net Premiums Earned Hit a Plateau
When insurers sell policies, they protect themselves from extremely large losses or an outsized accumulation of losses with reinsurance (insurance for insurance companies). Net premiums earned are therefore gross premiums less what’s ceded to reinsurers as a risk mitigation and transfer strategy.
Enact Holdings’s net premiums earned was flat over the last five years, much worse than the broader insurance industry. This shows that policy underwriting underperformed its other business lines.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Enact Holdings’s revenue to stall, a slight deceleration versus its 2.7% annualized growth for the past two years. This projection doesn’t excite us and implies its products and services will face some demand challenges.
3. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Enact Holdings’s full-year EPS grew at a weak 4.4% compounded annual growth rate over the last four years, worse than the broader insurance sector.
Final Judgment
Enact Holdings falls short of our quality standards. That said, the stock currently trades at 1.2× forward P/B (or $47.26 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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