We recently compiled a list of the Oppenheimer’s Favorite Stocks For Next 12 Months: Top 32 Stock Picks. In this article, we are going to take a look at where HCI Group, Inc. (NYSE:HCI) stands against Oppenheimer’s other favorite stocks for the next 12 months.
The tail end of August is appearing to turn a fresh page for Wall Street. The highlight event of the month was the Federal Reserve’s Jackson Hole Economic Summit, where Fed Chair Jerome Powell was expected to set the tone for the central bank’s interest rate cut cycle. Powell didn’t disappoint and commented that the “upside risks to inflation have diminished. And the downside risks to employment have increased” which leads him to conclude that the “time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
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Naturally, investors took this in full stride and the benchmark S&P flagship index soared by 1.01% to be just 1% shy of its record high in July. Before Chair Powell’s comments, earlier in the month, investment bank Oppenheimer had released its latest list of 32 stocks for the next twelve months. These stocks have been picked on the basis of their fundamentals, say the firm’s analysts, and are the “most timely” as per the firm’s analysts.
This latest set of stock picks comes as the firm has grown progressively bullish about the stock market over the course of 2024. The year started out with a report that set a 2024 close target for the flagship benchmark S&P index at 5,200. Right now, the index is at 5,634, so safe to say, the market has continued to defy expectations primarily because of investor mania for artificial intelligence. As he quoted chief investment strategist John Stoltzfus’s 5,200 index target, analyst James Watt admitted that while 2024 is the crucial election year in America, his firm’s clients should instead focus on the economy.
Taking a bullish view, the analyst shared that with “growing GDP, a jobs picture that continues to be strong, moderating inflation, and stable interest rates, our economic statistics look good.” Watt also commented on the interest rate scenario and conceded that “long term interest rates are notoriously hard to predict.” However, the economists’ expectations back then were “anywhere between one and three interest rate cuts,” and these could lead to the “tremendous amount of cash on the sidelines which will eventually be invested over the coming years” creating further upward pressure on equities.
One key factor that Watt mentioned is something that we’ve come across in analysis done by other investment firms too. Sharing “that the universe of investable stocks has significantly decreased over the years,” he also shared that “there are only 35 companies with a capitalization over $200 billion and just 83 companies with a capitalization over $100 billion.” These “are the companies the vast bulk of funds are invested in,” with the analyst warning that the key implication from this could lead to the supply and demand driving “the price of these dramatically due to limited supply.”
As the second quarter of 2024 came to a close, Watt’s views on the bifurcation in the stock market based on market capitalization remained unchanged. In his overview for Q3 2024, the analyst shared that “the NASDAQ and S&P are not really diversified when it comes to performance.” Since this concentration in just a handful of securities tends to nudge investors towards a non diversified stock portfolio, the analyst added that this “anomaly hasn’t always been the case but the long term benefits of diversification have remained a constant way to get through various market gyrations.”
However, by Q3, the financial firm’s views on the benchmark flagship S&P index had evolved. By then, Stoltzfus has first increased the target to 5,500 from 5,200 in March, sharing that an evolution in investor “mindset driven not so much by fear and greed but a need to invest for intermediate to longer-term goals suggest to us an opportunity to tweak our target higher.” As if this wasn’t enough, the strategy lead was out with another revision in August.
This boosted the target to 5,900 on the back of an upward revision of the P/E multiple to 23.1 from the earlier 22. Two additional key factors that drove the strategist’s optimism were an innovation cycle that was both cyclical and secular driving all 11 S&P sectors, and a generational shift in investment strategies driven “not so much by fear and greed but a need to invest for intermediate to longer term goal.”
Stoltzfus followed up a month later with an in depth analysis of the top 500 S&P index firms’ Q2 earnings to see which sectors had done well despite the mixed economic climate. Mind you, this analysis came just before his firm had released its latest set of 32 stocks, so it is important to learn its conclusions from the Q2 2024 earnings season. The strategist shared that the four sectors that were seeing double digit earnings growth were health care, financials, utilities, and consumer discretionary. Their earnings growth sat at 17%, 13%, 15%, and 16%, respectively. Stoltzfus added that nine out of 11 sectors had shown positive earnings growth, with the 8.5% overall growth leading to a surprise upside.
Looking at the robust data set, the analyst concluded:
“We remain overweight US equities while maintaining some meaningful exposure to international developed and emerging markets as the US Central Bank moves towards easier policy on greater confidence that its efforts to put untoward levels of inflation in check have been or are growing closer to being met. Volatility should be expected as the economy and the markets navigate the transitions taking place in the economy and monetary policy in a move towards greater normalization.”
So, as Oppenheimer continues to keep its eye on the evolving US economy and markets, we decided to see which stocks are on its radar.
Our Methodology
To make our list of Oppenheimer’s top stocks, we ranked its latest list of 32 stocks by the average analyst share price percentage upside.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A homeowner happily smiling while holding a copy of their new insurance policy.
HCI Group, Inc. (NYSE:HCI)
Share Price Upside: 46%
Number of Hedge Fund Investors In Q2 2024: 21
Average Analyst Share Price Target: $138.75
HCI Group, Inc. (NYSE:HCI) is a Florida based insurance company. It primarily caters to the needs of homeowners and provides them with insurance against fires and floods. HCI Group, Inc. (NYSE:HCI) also operates properties and provides software products for claims management and other services. The fact that HCI Group, Inc. (NYSE:HCI) is based in Florida creates a risk for the firm due to the evolving nature of climate related impacts on the insurance industry in the region. As they face rising damages from climate catastrophes, insurance providers are either exiting the market or raising premiums, both of which make business difficult. At the same time, it also means that if HCI Group, Inc. (NYSE:HCI) is able to manage its portfolio efficiently, then it could raise premiums following the exodus of other insurance firms. On this front, it is already facing tailwinds from the depopulation of Citizens Property Insurance, and HCI Group, Inc. (NYSE:HCI)’s software business also provides it with a high margin division to boost profits. Oppenheimer believes that the stock is undervalued and HCI Group, Inc. (NYSE:HCI)’s shares “will move toward fair value, which we think is significantly above the current price.”
HCI Group, Inc. (NYSE:HCI)’s management shared key details for the Citizen Insurance depopulation during the Q2 2024 earnings call:
“First, Condo Owners Reciprocal Exchange, known as CORE, assumed additional policies from Citizens, and its total run rate premium is approximately $70 million. Second, we completed our annual reinsurance program in the quarter, which included a structure similar to last year, and retention at both of our insurance carriers was largely unchanged. We were pleased with the outcome and we appreciate the continued support of our reinsurance partners.
We believe reinsurers recognize the value of our technology and our claims organization. With reinsurance now secure, we expect our total reinsurance spend across all reinsurance towers to be approximately $92 million per quarter. This includes the consolidation of CORE’s reinsurance spend and minor risk transfer enhancements. I’d like to reaffirm a few statements I made last quarter related to the assumption of policies from Citizens. First, I mentioned that we were retaining more policies than we expected. As more policies come up for renewal and transition to our paper, this is still the case. The retention of policies continues to exceed our expectations. Second, I mentioned that the loss ratio was coming in better than expected. As this book becomes more seasoned, this is still the case.
The loss ratio on policies we assumed from Citizens is continuing better than expected. Given the proven success of our technology to select attractive policies from Citizens, we have applied to assume additional policies from Citizens. Homeowners Choice has been approved to assume up to 25,000 policies in October. TypTap has also been approved to assume 25,000 policies in October. And both companies have applied to participate in a November assumption as well. Additionally, CORE has been approved to assume policies from Citizens in October. We will update everyone on our plans closer to the assumption date. Overall, we posted another quarter of solid profitability, and we continue to make solid progress on our top line and bottom line.”
Overall HCI ranks 6th on our list of Oppenheimer’s favorite stocks for the next 12 months. While we acknowledge the potential of HCI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HCI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.