Why Progressive Stock Is an Incredible Bargain Right Now

Key Points

The stock market has surged this year, and some investors have grown concerned about lofty valuations. Progressive is an auto insurer that has historically rewarded investors, but its shares are down more than 30% from their all-time high. The company has a strong market share and a long track record of profitable underwriting, making it a compelling stock to buy the dip on. 10 stocks we like better than Progressive ›

Investors are buzzing with excitement around artificial intelligence (AI) and the development of its surrounding infrastructure. Markets are surging as a result. The S&P 500(SNPINDEX: ^GSPC) is up 15% year to date, while the tech-heavy Nasdaq Composite(NASDAQINDEX: ^IXIC) is up 20% since the start of the year.

The bull market in stocks has been strong, and concerns have emerged about the lofty valuations today. Against this backdrop, it can be hard to find quality companies trading at a discount. However, one stock that is a screaming bargain right now is auto insurer Progressive(NYSE: PGR).

The company holds a strong market position in the insurance industry and has a proven track record of outperforming its peers. More recently, Progressive stock is in a downturn, having dropped 30% from its all-time high.

To me, this presents a very compelling opportunity to invest in the stock at a bargain. Here's why.

Progressive has been an excellent stock for long-term investors

Progressive is a leading automotive insurer in the U.S. with a 15% market share. Only State Farm, at an 18% market share, is larger. What makes Progressive compelling is that insurance products will always be in demand. Drivers always need coverage to protect themselves, and regulations requiring it ensure it will always see steady demand.

On top of this, Progressive stands out because of its superior underwriting ability. Over the years, Progressive has leveraged technology, notably telematics, to track driver behavior to assess risk and price policies accurately. This is just one aspect of its underwriting models that illustrate its stellar risk selection and claims discipline.

This underwriting advantage is evident when examining its combined ratio. During the past 20 years, Progressive's combined ratio has averaged 92% (lower is better). In other words, for every $100 in premiums written, it earned $8 in an underwriting profit.Chart by author.

In the insurance industry, the average combined ratio tends to hover around breakeven at 100% due to the highly competitive nature of the industry -- making Progressive's long-term outperformance all the more impressive.

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Why Progressive stock has been so weak

Progressive's recent weakness came following the announcement of its September results, when it said it would return nearly $1 billion to policyholders in Florida. Thanks to tort reform in 2022 in Florida, Progressive saw lower litigation costs and healthy underwriting margins. Because its profits from 2023 to 2025 exceeded statutory limits in the state, 2.7 million active policyholders will get a refund of $300 on average.

This refund wasn't unexpected, but did hurt Progressive's underwriting profit during the period, and its combined ratio for September increased to 100%. This likely caused concern among investors. But when you zoom out to the first three quarters of this year, Progressive still has an excellent combined ratio of 87.3%.

For the year, Progressive stock has been relatively weak as well. That's because there has been some concern that we are in a softer pricing environment. The insurance industry is cyclical, but it doesn't follow economic cycles in precisely the same manner as other cyclical stocks. Instead, the industry goes through "soft" and "hard" periods.

During hard markets, losses increase due to higher claims, competition retreats, and the most profitable insurers have an opportunity to take market share. During soft markets, losses tend to be lower, competition is higher, and it can be harder to maintain profitable growth.Image source: Getty Images.

There is some evidence that we are in a softer pricing environment, which could weigh on Progressive's growth in the near term, which is a significant reason the stock has been lackluster this year, despite the strength of the S&P 500. With that said, should inflation rear its ugly head once again, insurers like Progressive have pricing power to adjust to rising costs. Not only that, but its investments benefit from elevated interest rates.

Progressive is a screaming bargain

As a long-term shareholder, I'm not too concerned with Progressive's performance this year. The company continues to maintain a stellar underwriting record. If the company begins to lose its edge in policy selection or pricing, investors will see that reflected in a rising combined ratio -- and that isn't the case today.

Progressive is priced at 15 times next year's projected earnings, and the stock is trading at a valuation that is cheaper than it has been in almost two years. The company continues to maintain its edge, which is why I think the recent weakness makes the stock a no-brainer buy today.

Should you buy stock in Progressive right now?

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Courtney Carlsen has positions in Progressive. The Motley Fool has positions in and recommends Progressive. The Motley Fool has a disclosure policy.

Why Progressive Stock Is an Incredible Bargain Right Now was originally published by The Motley Fool

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