Arch Capital Group Ltd. (ACGL): Is This Undervalued Stock a Strong Buy Right Now?

We recently compiled a list of the 10 Best Undervalued Stocks To Buy Now. In this article, we are going to take a look at where Arch Capital Group Ltd. (NASDAQ:ACGL) stands against the other undervalued stocks.

Demographic Shifts and AI Innovation: A Bullish Case For the US Market

In the prior couple of years, experts and analysts were worried about a recession in the US and their best-case scenario was a soft landing. Experts are still predicting the latter. However, 2024 has proven to be quite a healthy year for the US stock market as it recently hit new highs on the back of technology stocks. Moreover, we also saw notable market broadening in the latest earnings season. However, Co-Founder and Head of Research at Fundstrat Global Advisors, Tom Lee is not just bullish on the current year but also sees the US stock market almost tripling by the end of the decade.

On June 26, Lee told CNBC that he believes the S&P 500 could reach 15,000, driven by a combination of demographic trends and technological advancements. He compared today's market to past periods of rapid growth, such as the 1920s and the 1950s-1960s. He credits the potential surge to an increase in the population of prime-age adults (30 to 50 years old), which is now led by Millennials and Gen Z. As these generations enter their peak earning years, their borrowing and spending are set to increase, and they are going to take major life decisions which are expected to drive economic growth.

In addition to these demographic factors, Lee highlights the transformative impact of artificial intelligence (AI) on the economy. He believes that AI presents a significant opportunity for US technology companies, especially as it addresses a global labor shortage by converting labor costs into technological solutions, which would probably boost the US tech sector revenues. Furthermore, the US, with its leading technology sector, is well-positioned to attract substantial global investment, especially as we see that other regions like China and Germany face demographic and economic challenges.

Despite Tom Lee’s optimism, he acknowledged several risks to his bullish outlook. He said that a global recession could undermine growth, and the development of AI could also backfire or cause geopolitical instability. Additionally, there is the potential for the stock market to peak prematurely, forming a bubble.

Despite the risks, Tom Lee predicts an optimistic outlook for the US market in the current decade. Based on his insights, this could be an ideal time to invest in the market for the longer term. Keeping in mind that Lee predicts good things for the future of AI, you can take a look at the 10 Best Artificial Intelligence Stocks to Buy Under $10.

Our Methodology

For this article, we identified over 40 stocks that were considered undervalued by other financial media websites. From that list, we narrowed our choices to 10 stocks whose forward PE ratio was either equal to or below 15 or was below their industry average, as of June 24. We listed the stocks according to their hedge fund sentiment, which was taken from our database of 920 elite hedge funds as of Q1 of 2024.

Why do we care about what hedge funds do? 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).

A close-up image of an insurance policy with hands standing firmly on top, conveying security.

Arch Capital Group Ltd. (NASDAQ:ACGL)

Forward PE as of June 24: 11.4

Number of Hedge Fund Holders: 45

Arch Capital Group Ltd. (NASDAQ:ACGL) is a Bermuda-based company that offers insurance, reinsurance, and mortgage insurance products. The company is trading at a forward PE of 11.4x. The Street-high estimate of $120 represents an over 20% upside to Arch Capital’s stock from June 24 levels. The company takes the fifth position on our list of best-undervalued stocks to buy.

Arch Capital's strength lies in its strategically diversified revenue avenues, which contribute to its resilience in the insurance market. The insurance segment accounts for 36% of its premiums and offers a wide range of products, including property, casualty, and specialized lines like professional indemnity and medical liability. This diversification not only spreads risk but also ensures consistent revenue sources and reduces the impact of market fluctuations on the company’s earnings.

The reinsurance segment makes up 58% of premiums. The segment has shown remarkable growth with a significant 41% increase year-over-year. This growth shows Arch's expertise in underwriting and also at seizing market opportunities. By providing reinsurance to other insurers, the company further diversifies its income sources while leveraging its underwriting capability to capitalize on evolving market conditions. These two strengths put Arch Capital in a favorable light in the competitive insurance landscape.

Moreover, Arch Capital's recent acquisition of Allianz's US middle market and entertainment businesses allows it to increase its presence in the $100 billion-plus US middle market. This strategic diversification aligns with the company’s goal to capitalize on diverse revenue sources.

In the first quarter, 45 hedge funds had stakes in Arch Capital Group Ltd. (NASDAQ:ACGL), with total positions worth $1.55 billion. As of March 31, Egerton Capital Limited is the most prominent shareholder in the company with a stake worth $314.38 million.

Artisan Value Fund stated the following regarding Arch Capital Group Ltd. (NASDAQ:ACGL) in its first quarter 2024 investor letter:

“Turning back to positive performers, other winners were Arch Capital Group Ltd. (NASDAQ:ACGL) and Airbus. Arch, a global reinsurer, has experienced strong growth over the past year as reinsurance markets have been in an upswing in terms of pricing and premium growth, while rising interest rates boosted net interest income. Additionally, margins benefited from lower acquisition costs, better expense management and reduced catastrophe losses. In its mortgage insurance business, high interest rates are a headwind to top-line growth but a tailwind for margins. Arch is an industry leader capably managed by a long-tenured team that has achieved an enviable underwriting record while at the same time seeking opportunistic growth. It has shown discipline in pulling back from writing business when pricing is soft, patiently waiting for turns in the cycle to put its strong capital position to work.”

Overall ACGL ranks 6th on our list of the best undervalued stocks to buy. You can visit 10 Best Undervalued Stocks To Buy Now to see the other undervalued stocks that are on hedge funds’ radar. While we acknowledge the potential of ACGL as an investment, our conviction lies in the belief that 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 ACGL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

 

READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.

 

Disclosure: None. This article is originally published at Insider Monkey.