When I was asked to find an undervalued stock in early April, I chose a Swiss insurance and reinsurance giant Chubb (NYSE:CB). Not long after that article was published, it was revealed that Warren Buffett was stockpiling, picking up approximately 26 million shares of the company.
I certainly can’t argue with Buffett’s logic or his choice of company. As a result, when I’m asked again to find an undervalued stock for this month, I’ll repeat my suggestion to consider Chubb. Could this undervalued stock make you a millionaire one day? Maybe; Read on to find out why that might be the case.
The value is still there
Wall Street analysts have revised their expected earnings per share growth for Chubb to around 9.5% annualized over the next five years. That’s the same growth rate I used in the discounted earnings model I developed in that April article to value the company at $324.04 per share.
As a result, I’m keeping my valuation estimate stable. With Chubb’s shares recently trading at $265.15 each, they could rise about 22% before reaching that fair value estimate. That in itself is a reasonable impulse. On top of these potential gains, Chubb offers investors a 1.4% yield, adding a little current income while they wait for the market to make its move.
Furthermore, the discounted revenue model that led to that valuation estimate was constructed with a discount rate of 12%. That discount rate represents the expected return an investor could expect over time if he bought the company at its estimated fair value and returned it in line with expected profits.
In other words, if the company’s stock rises to that fair value estimate, investors still have good reason to believe they can continue to earn decent returns beyond that point. As with any investment, the future is of course uncertain and depends heavily on how the company’s operations actually perform.
Still, it’s good to know that there is a path forward – based on reasonable assumptions – where investors have a good chance of solid long-term returns as owners of Chubb stock. Back that up with Buffett’s recently revealed significant ownership stake, and the balance of risk and potential reward makes it worth at least some serious consideration.
Now go stare
In the modern market, it is of course rare for a company to remain competitively priced for long. Add to that the prestige of being part of Buffett’s portfolio, and Chubb’s days as a value-priced stock could be numbered.
Indeed, Chubb stock has risen slightly since my previous article published in April. The result is that while it still looks attractively priced today, there is less potential bargain in the stock than there was a few weeks ago.
So make today the day you take the first step in deciding whether the stock deserves a place in your portfolio. If you buy and end up being right, you will find it plays a valuable role in your quest to reach millionaire status. If its stock doesn’t do well, at least you know you’re in good company if you can count the likes of Warren Buffett among your fellow recent buyers of his stock.
Should you invest $1,000 in Chubb now?
Consider the following before purchasing shares in Chubb:
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Chuck Saletta has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Can This Undervalued Stock Make You a Millionaire Overnight? was originally published by The Motley Fool
