Why I'm Liking First America Financial.
The insurance industry can be rather complex to maneuver through and is often "clear as mud." These days, the most tangible aspects of insurance are the Geico Gecko, Flo, and "Nationwide is on your side." However, I think I have pinpointed an excellent, easy-to-understand insurance industry play that will also be buoyed by the housing market upswing: First America Financial (NYSE:FAF).
First America Financial is a title insurance company. Title insurance is probably one of the simplest concepts in insurance. As InvestWhatWorks wrote in his CAPScall on FAF,
"Title insurance is insurance against a loss arising from problems connected to the title to your real-estate property. If purchase a home and there are unpaid taxes or liens (among other things) associated with the property, that is where title insurance would come into play. Simply put; title insurance is insurance against what may have happened before you purchased your property. Unlike other financial-entities involved with the housing market, title insurers have no major liabilities to threaten their business. Title insurance is relatively straightforward business and driven by fees generated by real estate sales and real estate refinancing. The title insurance is a transaction volume business. When real estate transaction volumes are high, profits are high. When real estate transaction volumes are low, profits are low. The type of transaction is also plays factor (lower-margin transactions verses higher-margin transactions; briefly mentioned later below). But generally speaking, title insurance is all about volume."
FAF has a single-digit price-to-earnings ratio (P/E) in macroeconomic conditions favoring the housing market AND insurance companies (namely, rising interest rates), thus Home Depot (NYSE:HD) and Prudential (NYSE:PRU) have also both been good plays on the housing market. A single-digit P/E indicates to me that the market is reasonably confident in FAF's ability to grow moving forward (not too frothy/foaming at the mouth and not too low meaning that FAF would be shrinking). And, FAF has a pretty sweet quarterly dividend of $0.12 payable per quarter.
What do you guys think? Is FAF a good pick, or is FAF a stock to stay away from? I might be missing something here and would appreciate hearing your guys' input.