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Normally, every quarter there is a reorganization in the FTSE 250 and the FTSE 100. It's a bit like football leagues, in the sense that some stocks move up due to their good performance from the FTSE 250 to the FTSE 100. Others move down. In the most recent review, Hiscox (LSE:HSX) received the call to the main index. What happens now? This is what I think.
The journey back to the top
To be clear, this is not the first time Hiscox has been big enough to drop out of the FTSE 250. Over the years, it has fluctuated between the two indices. It dropped out of the FTSE 100 in 2020 when the pandemic hit. Fast forward to 2024 and the share price rally of 12% has taken the market capitalization up to £3.57bn. This is enough to return to the big leagues.
Before I can fully explain where I think the stock is headed from here, it's important for me to understand how it has traded in the recent past.
The pandemic was not a good period for Hiscox, which specializes in small business insurance. During the 2020 financial year, it was hit by claims worth more than £350 million. Most of this had to do with event cancellations and business interruption. As a result, it posted a loss of £293m for the year.
However, since then it has been able to function well. After all, the pandemic crisis was a black swan. Under normal business circumstances, insurance is a proven, profitable operating model.
Engines fully fired
Over the past year, Hiscox has done well. Interim results that were published in August show that pre-tax profit grew by 7.1% compared to the first half of 2023. The division of revenues between the different divisions probably gave investors confidence in the future, as that no area dominates the others.
Retail is doing well, with the CEO also citing that “With the best real estate market conditions in a decade persisting into 2024, we invested more capital earlier in the year in our reinsurance business.”
Let's not forget that Hiscox has operations all over the world, including the United States and Asia. Therefore, even if the UK market underperforms, it can make up for it in other areas.
Thoughts for the future
Despite the share price rally, the price-earnings ratio is only 6.95. I consider this to be undervalued, as I use a ratio of 10 as a fair benchmark. Therefore, a promotion to the FTSE 100 could help the stock rise further as it attracts more attention from value investors.
One risk is that the stock misses out on the FTSE 100 to other, larger competitors. These include people like Admiral, Prudential, Legal and generalto name just a few! This could dampen share price momentum as investors may already have enough exposure to this sector.
Ultimately, I think the future is bright for Hiscox and I am considering adding it to my portfolio.
