Like many industries in the financial sector, the insurance industry has been one of the affected segments of the market amid the COVID-19 pandemic. As such, this has left many stocks in the industry potentially undervalued after experiencing sustained declines since the start of Q2.

Some of them have also posted some impressive earnings results in their most recent quarterly reports, which has captured the attention of the market. Here is one insurance stock that has compelling valuation multiples following the recent quarterly results.

Heritage Insurance Holdings (HRTG)

Shares of Clearwater FL-based company Heritage Insurance Holdings are down nearly 10% over the last five days. The company’s stock price gained more than 3% on Monday ahead of its Q3 earnings results, which came out after markets closed. 

This small-cap stock is now down more than 25% this year. It has experienced a relatively choppy trading campaign since bottoming in March. In August, shares of the property and casualty stock rallied to hit a yearly high of $13.70 before plunging to the current low of $9.78. This level of volatility makes it difficult to time the potential up-and-downs of the stock. 

To profitably invest under the current circumstances, traders should look to combine both fundamental and technical analysis optimally. 

Technical overview

There are several technical analysis apps that they can utilize, which help to gauge the overall market sentiment towards a stock. Trading apps such as these when combined with fundamental data from the company’s recent earnings can provide the edge needed to determine whether it is worth investing in a post-earnings rally.

Currently, shares of Heritage appear to be trading below a key support level in the daily chart.

The company’s stock is trading several levels below the 100-day and the 200-day SMA lines. The company last traded at these levels at the height of the first wave of COVID-19. Yesterday’s rebound pushed shares of Heritage Insurance off oversold levels of the 14-day RSI and back to the normal trading zone. This could be a signal of a potential recovery incoming. 

Fundamentals overview

From a fundamental perspective, it is important to understand how unpredictable the bottom line can be. This mainly relies on the number of claims made during a period. This can vary unpredictably because you cannot really predict when an accident will occur and thus the expected payments to policyholders.

As such, it makes more sense to look at the top line of an insurance company rather than the predicted bottom line. Currently shares of the company trade at a trailing price-earnings ratio of 8.60, which is incredibly lower compared to close peers.

Fellow property and casualty insurance stocks Horace Mann Educators Corp (HMN) and Kemper Corp (KMPR) trade at trailing 12-mont P/E ratios of 13.55 and 9.70, respectively. They also reported earnings on Monday after markets closed. 

This could suggest a potential case of relative undervaluation in the shares of Heritage Insurance. Heritage’s stock price also trades below the Peter Lynch optimal valuation of 15x P/E.

In the company’s most recent quarterly results, revenue grew by more than 25% to $165.1 million up from $131.6 million, year-over-year. For the nine-month period, the company’s top line stood at $433.8 million up from $372.8 million reported the same period a year ago.

As such, it is clear that Heritage Insurance is on track to outperform last year’s top line. The company also appears to be relatively resistant to the adverse effects of COVID-19, as noted by management. This is because it focuses on sections of the market that can be considered a necessity for consumers. 

Conclusion

In summary, Shares of Heritage insurance have plunged recently to create an interesting entry point. Technical analyses indicate that now could be a good time to buy while the fundamentals also appear to back that up. The next few months will be interesting to watch as we head to the tail-end of the year.