When you’re looking for high return investments, it pays to be skeptical of companies that rely too heavily on acquisitions. That’s because the buyer of something rarely knows as much about it as the seller. So it follows that if a company makes enough acquisitions, it might eventually buy something that has hidden problems. At some point, those problems will come out into the open and hurt the buyer’s earnings.
How a bad acquisition can cause high return investments to suffer
Acquisitions, particularly big ones, can also push up debt, which leaves the buyer vulnerable to failure if it can’t meet the payments. They can also load the buyer’s balance sheet with goodwill, an intangible asset whose value can drop overnight if it turns out that the company made a bad acquisition. In that case the company has to write off all or part of the acquisition’s cost against current earnings. This can wipe out a year’s earnings, and devastate the company’s share price.
We keep all of these factors in mind when we we’re looking for high return investments to recommend in our investment services and newsletters, including Stock Pickers Digest, our advisory for aggressive investing. [ofie_ad] In the latest issue of Stock Pickers Digest, we update our buy/sell/hold advice on two aggressive picks that plan to be active acquirers in 2011. One of these companies is insurance provider Intact Financial Corp. (symbol IFC on Toronto).
Higher premiums lifted Intact’s latest revenue and earnings
Intact is Canada’s largest provider of property and casualty insurance, based on premiums. Its brands include Intact Insurance, Canada BrokerLink, belairdirect and Grey Power. Intact has two product lines, personal and commercial: Its personal products contribute 70% of its premiums, and include automobile and property insurance that Intact sells to individuals.
Commercial products provide the remaining 30% of premiums, and include auto, property, liability, surety and specialty coverage that Intact mainly sells to small- and medium-sized businesses. Intact’s revenue and earnings both rose in its latest quarter. That’s because it continues to raise its home and auto insurance premiums. That’s offsetting weakness in commercial insurance premiums.
Intact can spend up to $1 billion on acquisitions
The company has $800 million more capital than it needs to meet regulatory requirements. With additional borrowing, it can spend about $1 billion on acquisitions. We take a closer look at Intact’s acquisition plans, and see what they could mean for the company’s share price, in the latest Stock Pickers Digest.
You can get our latest buy/sell/hold advice on Intact and 22 other potentially high return investments that may be suitable for the part of your portfolio you devote to aggressive investing in the latest issue of Stock Pickers Digest. What’s more, you can get the latest issue free. Click here to learn how.
