NEW YORK (TheStreet) -- As someone who came into the investment business in 1980, I was immediately enamored by the logic of Sir John Templeton. He was the founder and portfolio manager during the first 40 years of the Templeton Growth Fund.
During his tenure the fund beat the S&P 500 Index by 2% per year, net of annual expenses. We believe his best concept as a contrarian investor was his idea of buying common stocks at "the point of maximum pessimism.” In other words, he looked for meritorious common stocks among those that are contentious. He also took contentiousness one step further when he said, “If you wait to see the light at the end of the tunnel, you have already missed the bottom."
So what would Sir John think of Aflac (AFL)?
Aflac is largest seller and underwriter of supplemental health insurance. It is also the leading issuer of individual insurance policies in Japan. The price of common shares plummeted in the financial crisis of 2007-09 to $11.49 per share and now hovers around $59, down 12% for the year to date.
The shares then took a beating in the European debt crisis of 2011 as Aflac had a small but meaningful position in its bond portfolio in Portugal, Ireland, Greece and Spain. The losses taken on those bonds led Aflac’s stock to fall in price to $31.46 per share. After recovering in 2012, the shares have been bypassed by the U.S. market’s performance in recent years, despite the fact that is has increased in price from 49 cents to around $59 per share over the last 30 years. This seems very cheap to us when you consider analysts expected earnings of $6.24 per share this year.
There are three difficult business factors associated with Aflac that lead it to have a P/E ratio below 10 on consensus 2014 earnings. First, the Japanese yen has weakened in the last couple of years from 80 per dollar to about 102. The Japanese government has made it very clear that they would like to see the weakness continue. Since Aflac earns 74% of its profit from Japan, currency weakness reduces profitability.
Second, the implementation of the Affordable Care Act in the U.S. has made small to medium size businesses both leery and distracted, which has made sales comps difficult. Aflac has also had a difficult time translating its fantastic branding into strong growth in the U.S. Lastly, Aflac owns a huge investment portfolio heavily invested in bonds designed to match maturities with future insurance liabilities.