Relying on the Hartford

03/29/2010 11:29 am EST

Focus: STOCKS

Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Andrea Kramer of Schaeffer’s Investment Research says the venerable insurance and financial services company is underrated by analysts and should rise higher.

[An] optimistic article [in The Wall Street Journal’s Heard on the Street column]—"Hartford Financial’s Rally Still Has Legs," March 18th)—notes Hartford Financial Services' (NYSE: HIG) recently announced plans to repay TARP funds, as well as the stock's impressive 52-week ascent. However, some on the Street think HIG's rally may be running out of steam.

For instance, John Nadel of Sterne Agee calculates the equity's fully diluted book value at $31.70 per share, meaning the stock is trading at about 90% of book value. Plus, the analyst says Hartford "trails competitors in key areas, like its credit rating and expected return on equity."

Nevertheless, the [Heard on the Street] columnist points out that many HIG fans think the security's book value is "substantially higher." More specifically, the author says that, with the company sitting on $5 billion of unrealized securities losses that could be reversed as credit markets rebound, "future dilution could end up being a lot less."

In fact, assuming the stock's per-share book value is instead around $37, HIG is trading at a more attractive 77% of book—implying that "the stag's run may not be over." (It closed just below $28 Friday—Editor.)

With the shares of HIG boasting a 12-month gain of more than 220%, it's no surprise that option speculators have flooded the bullish bandwagon. During the past couple of weeks, traders on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have bought to open almost five times more HIG calls as puts.

In fact, the security's ten-day call/put volume ratio of 4.73 stands only nine percentage points shy of an annual optimistic acme. In other words, option players on the ISE/CBOE have initiated bullish bets over bearish at a faster clip only 9% of the time during the past year.

In that same vein, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.78 indicates that calls comfortably outnumber puts among options with less than three months to expiration. What's more, this reading registers in the 39th percentile of its annual range, pointing to a more-optimistic-than-usual outlook among most short-term options speculators.

However, according to Zacks Investment Research, only six out of 19 ranking analysts consider HIG worthy of a Buy or better rating. In addition, the average 12-month price target on the stock stands at only $29.25, Thomson Reuters reports.

From a contrarian standpoint, the bearish holdouts among the brokerage bunch could actually be a boon for HIG. Should the financial concern continue to make progress both on and off the charts, the lingering skeptics could convert to the bullish bandwagon. A fresh wave of upbeat analyst endorsements could help HIG extend its year-to-date climb.

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