Growth for a decade, not a few months

My general thinking is that growth stocks should experience an increase in the share price in the future. Until the business reaches a more mature state and can’t really grow materially much more, the stock should continue to attract buyers. As a long-term investor, buying now and holding for years to come should allow me to benefit from these compounding gains.

For example, the first stock on my radar is Tesla (NASDAQ:TSLA). Yesterday I wrote about the electric vehicle manufacturer and why I think the short-term sell-off isn’t completely justified. With the earnings per share figure growing for each of the past eight quarters, I think the business is becoming much more appealing. As the share price moves back to a fairer valuation (it’s down 7% in the past year), it provides me with a good opportunity to buy.

I get that global supply chain issues could dampen vehicle production in coming quarters. But the infrastructure with the gigafactories is there for the future to be able to ramp up operations when feasible.

It also speaks to my aim of finding a stock that can help me to retire early. Electric vehicles are the future, not just for the next year but for the next decade. The share price gains that I could make if Tesla remains at the forefront of this sector could be very large.

A growth share hidden in the FTSE 250

Another company that ticks the box is Hiscox (LSE:HSX). The FTSE 250 insurance company specialises in small business cover. One area that it focuses on is cyber and data protection. With the UK becoming a more digital economy, I think this area will be a big revenue source for Hiscox in years to come.

It did post a disappointing set of results for the first half of the year. However, most of the issues aren’t problems I envisage staying around for the long term. Some issues mentioned were the war in Ukraine, foreign exchange headwinds with a strong US dollar and the sharp increase in interest rates.

The share price is still relatively muted after the August results, with the price up a modest 3.5% over the past year. If anything, this provides me with a better entry point when I consider buying to hold this for the future.

I feel the business could help me retire early due to the elevated customer demand for specialist insurance types, like cybercrime. It’s also not reached the size of larger players that are in the FTSE 100. With good future performance, it should be able to become a player at the big table.

I’m thinking about buying both stocks now to add to my portfolio.

I think both of these companies have substantial competitive advantages as well as robust business franchises, which should help them capitalise on the economic recovery as it takes shape. 

Shares to buy for 2022

The first company on my list is the insurance group Hiscox (LSE: HSX). This corporation has suffered over the past 24 months, due to rising claims from business interruption insurance policies.

These claims have forced the group to make substantial payouts to customers, which have weakened its balance sheet and reduced its ability to capitalise on rising insurance rates across the rest of the market. 

However, as the company works its way through these issues and new policies are issued that exclude pandemic cover, this headwind should come to an end shortly. It should then be able to capitalise on favourable tailwinds in the rest of the sector. These are the reasons why I think the corporation would make a great addition to my portfolio of UK shares in 2022. 

With the shackles removed, Hiscox’s growth could accelerate. This could drive a re-rating of the stock. 

That said, the company will always be exposed to insurance risks. Challenges like significant catastrophe losses could hit profitability and weaken its balance sheet. This is something I will be keeping in mind. 

UK shares for growth 

The other company that I think is one of the best shares to buy now is Great Portland Estates (LSE: GPOR). This business owns a unique selection of properties in Central London. The value of these properties plunged last year as the pandemic wreaked havoc with the real estate sector across the country.

However, this year, property values have started to recover. Great Portland’s portfolio increased in value by 2% during the six months to the end of September.

It has also been signing new leases with tenants. The average rental uplift on these leases is nearly 10%. This shows the quality of the portfolio and the rising demand for office space in the centre of the capital.

Despite these attractive qualities, the stock is still trading below its net asset value per share of 796p. Considering this valuation gap, I would buy the stock for my portfolio. I think the value of the shares could increase next year as the economy rebuilds. 

Headwinds the enterprise and may face over the next 12 months include higher interest rates, which could increase the cost of its debt. Additional pandemic restrictions may also hit demand for new leases. This would hurt the firm’s outlook and near-term recovery potential from the pandemic. 

Worrying developments in Denmark suggest that a dark new chapter in the pandemic could be around the corner too. Hundreds of cases of mutated Covid-19 have been detected that are thought to emanate from the country’s mink farms. Hopes of a clear upturn in the global economy following the horrors of early 2020 are clearly on shaky ground.

That said, I haven’t stopped buying UK shares for my Stocks and Shares ISA. There are still plenty of big-dividend-paying shares out there that could help me get rich despite the threat of a long social and economic crisis.

An ISA investment trap?

Tobacco stocks like British American Tobacco (LSE: BATS) are traditional havens for dividend hunters in troubled times. The addictive nature of their products meant that they could be relied upon to be strong profits generators regardless of the broader state of consumer spending power. This quality still gives it the edge over many other UK shares.

But it doesn’t mean that I’m tempted to buy the FTSE 100 stock today, despite its mighty 8.5% forward dividend yield. Around 60m smokers stubbed out for the last time between 2000 and 2018, according to the World Health Organisation. And the rate of quitters is likely to accelerate as global lawmakers step up their fight against tobacco with public smoking bans, marketing restrictions and so forth. The same regulatory push casts a shadow over the long-term profits outlook for British American Tobacco’s vaping products too.

A better UK share I’d buy

Hiscox Limited (LSE: HSX) is a traditional safe-haven stock I’d much rather invest in today. Spending on general insurance is also one of those things that remains stable during economic upturns and downturns. This particular UK share is one of the insurance industry’s most trusted brands too, making it an ideal pick for these uncertain times. The Covid-19 crisis has caused demand for goods and services with long and proud histories to spike among frightened citizens.

The FTSE 250 insurer’s decision to suspend dividends in April as infection rates ballooned terminates its record of annual payout increases. Still, Hiscox announced plans to pay a dividend later in the year during its latest reassuring update. And based on current City projections, this UK share boasts an inflation-mashing 2.9% dividend yield. Expectations that the annual dividend will soar above 2019 levels next year drive the yield to a much meatier 4.5%.

Finally, Hiscox trades on an undemanding forward price-to-earnings (P/E) ratio of 13 times for 2021. It’s not as good as British American Tobacco’s readout of 7 times for next year. But it’s still quite low when you consider this UK’s brilliant defensive qualities. Besides, the insurer is in much better shape to deliver terrific long-term gains than the battered tobacco titan.

Hiscox is an international specialist insurer that provides general and commercial insurance products to its customers. These products can range from general home insurance to more complex commercial insurance for businesses.

FTSE recovery opportunity

In 2020 so far, HSX has lost approximately 40% of its share price value. At the turn of the year, shares were trading for 1,430p per share. As I write, shares can be picked up for just 848p. It is worth noting that at the height of the market crash, shares plummeted as low as 692p per share. It has recovered 25% since that low price.

There are three key reasons I believe HSX represents a potential recovery opportunity. First, HSX was one of eight UK insurers that participated in a legal test case to determine whether it should pay out on business interruption claims related to Covid-19 and the pandemic. Based on a favourable High Court ruling, the payout it expects to make is less than one-third the amount initially feared. In monetary terms, this equates to approximately £100m in payouts. I believe this is a good result based on the fact it has approximately 34,000 business interruption policies. The payout figure could have been far higher.

Second, at its current price, I feel shares are cheap to buy right now. The FTSE has been badly beaten by the Covid-19 pandemic and many share prices across it have been weighed down. HSX shares are trading at close to 1.5 times book value, which is a lot lower than in recent times. In addition, broker forecasts for 2021 suggest a healthy $0.74 earnings per share amount with a potential dividend of $0.42. For a company with HSX’s track record, this is an excellent price in my opinion.

Trading update

The final reason is the trading update HSX released today for the nine months to 30 September 2020. For me there were some key indicators showing HSX’s business is resilient against the backdrop of economic uncertainty. Gross written premiums grew by 2%. There was a growth in customer numbers and in the third quarter alone, premiums grew by 15%.

Hiscox separates its business into different segments and nearly all of them saw some form of improvement since the crash. Retail reported growth in all five of its business units driven by its digital platforms. Reinsurance and Insurance-linked Strategy achieved good growth at July renewals with rates up 12% for the year.

HSX has prudently prepared for catastrophe claims in the form of reserving $75m in the third quarter. I believe this shows financial resilience and good planning ahead despite the economic uncertainty across the world.

My verdict

Overall I would be willing to buy shares in HSX at its current price point. I firmly believe it is an FTSE recovery opportunity. The High Court ruling in its favour regarding business and interruption policies and today’s trading update solidify my belief. Don’t be surprised to see HSX’s price and performance continuing to creep in an upward trajectory over the coming months.

Both companies operate in the insurance sector, which is where Buffett made his fortune. Insurers are out of favour in the UK at the moment, but recent news suggests to me that investors can look forward to improving performance and some high dividend yields.

Covid claims cut

My first pick is commercial and general insurance group Hiscox (LSE: HSX). The firm is one of eight UK insurers which took part in a legal test case to clarify whether it should pay out on business interruption claims relating to the coronavirus lockdown.

The High Court has now released its judgement on this case — apparently it’s “more than 160 pages”.

What we need to know is that Hiscox’s share price rose by 17% after the firm confirmed it now expects to payout on “fewer than one third” of its 34,000 UK business interruption policies. The company now expects to payout less than £100m on these claims. Previous estimates suggested a worst-case payout of £250m, so this is much better than feared.

Hiscox shares could be cheap

Hiscox shares are down by around 40% this year, even after Tuesday’s gains. Uncertainty over Covid-related claims has been weighing on the share price, but now that we have some clarity on this I think the outlook could improve.

Indeed, I think this UK share could be cheap at current levels. Broker forecasts for 2021 suggest Hiscox could generate a earnings of $0.74 per share next year, with a dividend of $0.42.

That prices the stock on about 15 times forecast earnings, with a dividend yield of 3.8%.

For a company with a pretty successful track record, this looks very affordable to me. I’d also note that Hiscox shares are only trading at around 1.5 times book value — again, this is much lower than in recent years. I see Hiscox as a possible recovery buy.

Cheap UK shares: this 6% yield looks safe to me

Another winner from this week’s High Court judgement was FTSE 100 firm RSA Insurance Group (LSE: RSA). The RSA share price closed up by nearly 5% following that court judgement, continuing a recovery that’s seen the stock climb 50% from its March lows.

RSA now expects to face a bill for £142m relating to Covid business interruption claims in the UK, although it says the final figure could be lower. This looks easily affordable to me, given that RSA reported a surplus capital of £1.1bn at the end of June.

Shareholders should also be able to look forward to the return of RSA’s dividend. In its half-year results, the company said it expected to resume payments at the end of 2020. Management also said it’s planning to “catch up on missed dividend payments over time.”

City analysts expect RSA to declare a dividend of 27.2p for 2020, rising to 30p in 2021. These forecasts suggest a yield of 5.8% this year, rising to 6.4% next year. These forecasts look reasonable to me.

With the shares trading on just 12 times forecast earnings, I see RSA as a good, cheap, UK share to buy right now.

The companies, which were once some of the best income FTSE 100 stocks, have also been asked to cut their dividends by regulators.

The regulators hope freezing dividends will free up more cash for financial companies to deal with the coronavirus crisis. While this is a disappointing development, it could be an excellent opportunity for long-term investors.

FTSE 100 stocks on offer

As FTSE 100 stocks go, Hiscox is one of the best. The company is one of the largest insurance businesses in London.

It hasn’t got to where it is today by accident. The group has a reputation in the insurance industry for shrewd and conservative underwriting — essential qualities to make it big in the market.

Unless the company suffers a sudden outflow of talent, it is unlikely that the crisis will cause the business to lose this reputation. As such, Hiscox seems well placed to weather the storm and could potentially come out stronger on the other side.

Insurance is an essential product for many businesses, homeowners and drivers. That’s unlikely to change over the next three to six months. 

The crisis could even drive customers to Hiscox rather than other competitors. The company’s size and reputation will help it stand out if peers start to fold due to market uncertainty.

Therefore, long-term investors should look past the company’s recent dividend cut and focus on its long-term potential.

Former income champion

RSA Insurance has also announced that it is has postponed its final dividend payment for 2019.

While this is disappointing, it could be an opportunity for patient investors willing to buy FTSE 100 stocks today.

Shares in the company have fallen around 30% this year, sending the stock down to a five-year low. After this decline, shares in the insurance giant are dealing at a forward P/E of 8.7. That suggests the stock offers a wide margin of safety at current levels.

Further, while RSA has put its dividend on ice for the foreseeable future, the company should reinstate the dividend when the economy returns to normal.

This suggests that investors could be in line for a dividend yield of around 6.6%. That’s assuming the payout is reinstated at 26.4p. Before the coronavirus crisis, City analysts were expecting the dividend to hit this level in 2020.

Like Hiscox, RSA’s greatest asset is its reputation. The company has been successfully providing insurance for around 100 years. This is unlikely to change over the next few weeks and months.

As such, when the economy returns to normal, RSA’s growth should pick up again. That’s why long-term investors should consider taking a closer look at this industry stalwart after recent declines.

When the economy recovers, both of these FTSE 100 stocks should see a healthy recovery, I feel.

Great results, inconsistent share price

First, let’s consider retail bank BGEO, which posted an impressive 30% increase in profit for the first nine months of 2019. This is a great endorsement for the share, which is still far from the highs it last saw before it split from its investments arm, Georgia Capital, last year. In the two weeks from mid-May to the beginning of June last year, the share price almost halved.

Nevertheless, the bank itself is optimistic of future performance, particularly as it’s linked to the health of the Georgian economy. Robust growth and an upgrade in its credit rating by S&P are pointed out in the earnings release as positives for the economy.

The fact remains, though, that Georgia is a small, growing economy and a slowdown can potentially hit banks there more than they would in more developed markets. Its share price movements over time don’t give me confidence that it will necessarily give capital gains for a long-term investor either. Still, it’s worth keeping on the radar for developments over time.

Poor results, dependable share price

If BGEO’s share price has seen its ups and downs, investing giant Hiscox has seen a pretty much smooth increase in price over the long term, though the past year has been a challenge. A disastrous results announcement earlier this week worsened the share price situation, with an almost 15% decline by Thursday, before recovering somewhat by the end of the week.

Still, over the longer term, there’s much to like in HSX. First, its highly diversified operations across markets like the UK, Europe, US, and Asia gives it immunity to any Brexit-related discomfort investors might be feeling these days.

Second, not always but often enough, the best indicator of the future is the past. And if this insurer’s share price is anything to go by, long-term investors can breathe easy. Over the past five years, the share price has more than doubled and investors who bought the share 10 years ago are sitting on a cool 350% appreciation of their capital today. I’d strongly consider buying it today.  

If both BGOE and HSX share price hadn’t gyrated so sharply in the same week I doubt I would have ended up talking about them in the same breath. But now that we are here, it’s a precious investing lesson in refraining from getting carried away with a single set of results. It’s better to look at the longer-term patterns instead.

Chief executive Bronek Masojada spoke of “significant catastrophe losses from storms in the US, the Caribbean and Japan,” with the firm having to set aside $165m for claims from Hurricane Dorian and Typhoons Faxai and Hagibis. That’s “materially in excess of the group’s catastrophe budget for the second half,” and fees and profit commissions should be around $25m lower at the end of the year too.

If that’s not enough natural disaster for one year, Hiscox also has exposure to the California wildfires, though at this stage it can’t tell us the size of any potential loss.

Price fall

The morning’s price drop has taken the shares down nearly 25% over the past 12 months, and with the potential for such catastrophes, I’m not surprised if investors shy away from insurers like Hiscox. But if you do invest in companies like this, you have to know you will take short-term hits from time to time, and only buy if you think the shares are good value for the long term. That’s especially important with disaster insurance, which must suffer from the worst short-term unpredictability in any sector.

So what’s Hiscox done for those long-term investors who understand the risk? Even after the decline of 2019, over five years, the Hiscox price is up 55% compared to the FTSE 100‘s 11%. Dividend yields have varied between 2% and 3%, so that’s a very good overall return.

If this is the kind of insurance sub-sector for you, the current weakness might even provide a good buying opportunity.

Safer

I prefer less specialised general insurers like Aviva (LSE: AV) myself. I see them as safer and more likely to provide reliable and progressive dividends, which is a core requirement for me.

Saying that, Aviva hasn’t exactly set the world on fire over the past five years, with its 17% share price loss comparing badly to a simple index tracker, never mind to Hiscox’s strong gain. On the plus side, Aviva has been paying bigger dividends, with its yield reaching 8% in 2018 — and the current year is forecast to deliver 7.4%.

But the shares are on very low P/E multiples of only around seven, so big investors are clearly not convinced by the Aviva proposition at the moment. I think that’s for a number of reasons.

Complexity

One is the complexity that is Aviva. The company, under the leadership of new CEO Maurice Tulloch, is in the process of splitting out its two UK businesses, general insurance and life insurance. It’s no easy task and could take some time, and such a serious restructuring clouds the horizon with the kind of uncertainty that the City hates.

Plans to cut costs by up to £300m lead to fears of pressure on the dividend too. After all, when a company needs to rein in its cash outflows, I usually advocate a careful look at the dividend. But it is well covered, and I’m relatively upbeat about it.

I can see the Aviva share price remaining low until some clarity emerges, but I still see it as a top income buy and I’m happy to keep pocketing my dividends.

Many commentators put the slowing growth down to Brexit with a lack of demand seen for both services and the construction side. Meanwhile, if we see a negative print for the third quarter of this year, this technically puts the UK into a recession. However, as the old Warren Buffett adage goes, “be fearful when others are greedy and greedy when others are fearful”. Therefore there is plenty of reason to look into the below stocks if the economy does take a nose-dive.

Play it safe

I like Hiscox (LSE:HSX) as my first choice. It’s an insurance provider, but operates in a slightly more niche area of the market – whilst it still provides the standard services, you can get insurance for kidnap and ransom demands, etc.

If we do see a recession, this tertiary/services sector of the FTSE 100 will likely hold up well due to the inelasticity of demand. Think of it this way – if the economy is hit hard, will the average Joe decide not to pay his contents insurance, or not to pay for his new designer shoes? Added to this is the unusual insurance which Hiscox provides, which differentiates it away from other mainstream insurance companies. Even with recent results giving it a share price dip, I wouldn’t be concerned.

Sleep well

I can see Whitbread (LSE:WTB) performing well if the domestic economy takes a hit. The largest and oversized brand for its financial performance is the ‘Premier Inn’ chain of hotels. This is a predominately UK franchise (although they are slowly moving abroad), which some may flag as a concern as it exposes them fully to weaker demand. However, I say the opposite.

History has shown us that during recessions, one of the first things the consumer cuts back on are luxuries. With the consumer having less disposable income, they still need a holiday but can’t afford to go abroad.

Therefore Premier Inn hotels could see boosted demand from UK clients looking to have a holiday without going international. Add to this that Whitbread has low-end brands such as ‘Beefeater’ and ‘Thyme’ restaurants, which again could see demand boosted as domestic clients seek cheaper alternatives to eating out.

A message in a bottle

My third pick is Coca Cola HBC (LSE:CCH) . It bottles most of the Coca-Cola for Europe, having picked up the rights back in 1969. Whilst this is the main business line, it does have other strings to its bow; it announced a couple of months ago that it would be helping to launch Costa Coffee into European markets next year.

The company fits the bill for a UK recession booster for many reasons. One of the key ones is its limited exposure to the UK. Whilst I listed this as a plus for Whitbread, it is not the case for most businesses. The fact that the company anchors itself from a US company, and trades throughout Europe, means a shock to the UK economy will not unduly affect its share price. Further, a recession that leads to a weaker pound will also help profits when repatriating European earnings back from Euros.

Positives included an increase of 4% in the interim dividend to 13.75 cents. Pre-tax profit was up 3% to $168m, fitting the higher end of the trading guidance which was predicted to be between $150m and $170m. This was driven by a strong investment return of 4.8%, benefiting from financial market movements in the six months to 30 June.

Gross premiums were up 7% globally and all business segments saw robust revenue growth.

“Looking ahead, with six consecutive quarters of rate growth in some Lloyd’s business, the market is in a better position than it has been for some time,” said CEO Bronek Masojada.

Hurricanes ahead

Despite the relatively good news, the share price dipped slightly. Overall, Hiscox’s capital position remains strong but with hurricane season fast approaching, fear of the unknown is to be expected. I think a volatile time for the share price could be imminent. Human-induced climate change is increasingly making headline news and I find this a worrying challenge for insurers to deal with in the catastrophe sector. 

“As ever, the results of the half year are no indication of the results of the full year, so as we approach hurricane season, there is still potential for the wind to blow us off course,” said chairman Robert Childs.

Although the results had a generally positive outlook, downsides included a higher volume of claims in the first half than in the same period the previous year. 

Hiscox’s combined ratio rose to 98.8%, an increase of 10.9% from the same prior-year period. This was not good news as it is a measure of how perceptive the company is at choosing who and what to underwrite. The increase in claims during this period contributed to this.

The full-year combined ratio for Hiscox Retail is expected to be at the top end of its predicted 90%-95% range, which has partly been caused by an increase in the volume of claims by US Directors & Officers of private companies, it said. The group has begun to reduce its exposure in this area, according to the chairman’s statement. 

On top of all this, the group has been implementing a new IT system, which did not go as smoothly as planned, weakening retail growth and contributing to the drop in gross written premiums by 1.7%.

Trying times

The company’s recent guidance warned of a lower level of earnings cushion to absorb the impact of catastrophe events ahead of hurricane season. It has now confirmed that the reserve strengthening required will be impacted by around $40m for Typhoon Jebi in Japan and Hurricane Michael in Florida.

Profits in the overall insurance market from catastrophic events in 2018 have been significantly deteriorating as industry loss estimates have increased and underwriting has been impacted by reserve strengthening.

So are the fundamentals good enough to add this stock to my portfolio? Although I like this company for the long term, it has a very high trailing price-to-earnings ratio of 39 and a high debt ratio of 79.

I’d be inclined to steer clear at the moment and hold off for a larger dip in the share price or better news to come.