Will Travelers See Rising Prices?

With shares of Travelers Companies Inc. (NYSE:TRV) trading around $82, is TRV an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Travelers is engaged in providing a range of commercial, personal property, and casualty insurance products and services to businesses, government units, associations, and individuals. The company is organized into three business segments: Business Insurance, Financial, Professional and International Insurance, and Personal Insurance. Through its segments, Travelers offers an array of property and casualty insurance, insurance-related services, surety and financial liability coverage.

Travelers released an earnings report today that easily beat analyst earnings and revenue expectations. In general, consumers and companies worldwide like to mitigate risk as much as possible, hoping to avoid the uneasiness that uncertainty brings. As new risks are identified, and existing ones covered, look for companies like Travelers to continue to see rising profits.

T = Technicals on the Stock Chart are Mixed

Travelers’s stock has seen a consistent uptrend over the last several years. The stock is now trading slightly lower, as investors digest the most recent earnings report. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Travelers is trading between its key averages which signal neutral price action in the near-term.

TRV

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Travelers’s options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Travelers Options

17.84%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Steep

Average

September Options

Steep

Average

As of today, there is average demand from call buyers or sellers, and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts, and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates, and what that means for Travelers’s stock.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. In addition, the last four quarterly earnings announcement reactions can help gauge investor sentiment on Travelers’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Travelers look like, and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

69.05%

15.35%

-48.18%

179.75%

Revenue Growth (Y-O-Y)

0.47%

-1.00%

1.63%

1.64%

Earnings Reaction

-3.71%*

2.09%

1.74%

3.58%

Travelers has seen increasing earnings and revenue figures over most of the last four quarters. From these numbers, it seems the markets have had mixed feelings about Travelers’s recent earnings announcements.

* As of this writing

P = Average Relative Performance Versus Peers and Sector

How has Travelers stock done relative to its peers, American International Group (NYSE:AIG), WR Berkley (NYSE:WRB), American Financial Group (NYSE:AFG), and the overall sector?

Travelers

AIG

WR Berkley

American Financial Group

Sector

Year-to-Date Return

15.00%

32.18%

12.11%

33.02%

7.31%

Travelers has been an average relative year-to-date performer.

Conclusion

Travelers provides valuable insurance products and services to an increasing number of consumers and companies. However, a recent earnings report has investors in the company feeling a bit disappointed. The stock has been on a modest rise over the last several months, but is now seeing a slight pullback. Over most of the last four quarters, investors in the company have had mixed feelings about the stock, though earnings and revenue figures have been rising. Relative to its peers and sector, Travelers has been an average year-to-date performer. WAIT AND SEE what Travelers does this coming quarter.

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