How to Take Advantage of Nervous Nellies

NEW YORK (TheStreet) -- As the Dow declines, insurance stocks drop more.

Companies including MetLife(MET Quote) and Prudential Financial(PRU Quote) are scheduled to publish third-quarter earnings by the end of next week, so higher volatility -- even nervousness -- can be expected.

But are investors making a smart move by unloading insurers? The past three months, when the stock-market rally powered along while the economy probably started growing again for the first time in a year and a half, helped separate insurance winners from losers. In other words, now is not the time to get out of the industry as another push upward is likely on the way. Hartford Financial Services(HIG Quote) and Genworth Financial(GNW Quote), which have fallen as much as 16% in the past week, don't deserve such punishment. Hartford is up seven-fold from a low in early March, while Genworth has jumped 11-fold.

Some selling of stocks has occurred to lock in investment gains, although volume is at 77% of its average. There has been a rise in shorting -- investors betting on declines -- with an average short interest ratio of 4.7 versus 4.6 for the month. Investors don't entirely believe that insurers' third-quarter results will indicate a positive end for the year. Maybe it's all too good to be true.

After all, Standard & Poor's on Tuesday put seven mortgage-insurance companies on credit watch with negative implications because of recent results from MGIC and Old Republic International(ORI Quote). Those included PMI Group(PMI Quote), Radian Group(RDN Quote) and, more surprisingly, Genworth.

The catch-all approach reflects S&P's belief that earnings will be lower than expected and that it misjudged the market in previous reviews. S&P said it may reduce or affirm ratings at previous levels, depending on analyses of third-quarter results.

Still, if Ameriprise(AMP Quote) is any indicator of the future, investors are being too cautious. Ameriprise exceeded analysts' expectations, with earnings of $1 a share, much higher than the consensus of 64 cents.

Hartford and Genworth, in particular, stand out as opportunities. The companies' price-to-book values are 76% and 42%, respectively. If quarterly earnings show an improvement, their book values will rise, and their share prices will have to keep pace.