I’m always interested in buying stocks where the share price has fallen as a result of problems or negative news flow concerning one of its rivals.
Of course, I appreciate that there is sometimes read-across for other stocks in a sector when one incumbent reports disappointing numbers or releases some bad news. However, I usually find that there is an overreaction by the market to negative news flow emanating from a rival company.
So, when the share price of Esure (LSE: ESUR) fell by around 20% recently, I suddenly became very interested in sector peer Direct Line (LSE: DLG).
Just to give you some background, Esure had reported a dividend that was 14% below market expectations. This disappointed investors in the biggest stock market flotation of the year, since the high dividend was viewed as a main attraction of the business when it first floated.
However, what the market failed to realise was that Esure is actually doing quite well, with profits being slightly ahead of market expectations.
Certainly, the results did not warrant a 3% share price fall in Direct Line — how is its business any worse off just because a rival pays a smaller dividend than everyone thought it would!?
Indeed, I think that Direct Line is well worth buying after having come off from highs of 236p earlier this month to its current price of 221p. Not only does it offer a fantastic yield of 5.4% but it comes at a low price, too. Its price-to-earnings ratio is just 10.6 and this compares very favourably to both the FTSE 100 on 14.8 and the non-life insurance sector on 13.5.
Moreover, with higher inflation and low interest rates more likely to be features of the stock market in future years, stocks such as Direct Line could be very useful for retirees like me. In fact, other relevant shares can be found in an exclusive report entitled ‘5 Shares You Can Retire On’.
The report is completely free and I would really recommend you take a look by clicking here.
> Peter does not own shares in Direct Line.