ACGL Stock Near 52-Week High: Should You Buy or Wait for a Pullback?

Shares of Arch Capital Group Ltd. ACGL closed at $110.26 on Thursday, near its 52-week high of $114.62, after having gained 48.5% year to date. Shares outperformed the industry, the Finance sector as well as the Zacks S&P 500 composite index in the same time frame. ACGL shares are trading well above the 50-day moving average, indicating a bullish trend.

Arch Capital Outperforms Industry, Sector & S&P YTD

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This leading specialty P&C and mortgage insurer has the potential to retain the momentum, given new business opportunities, rate improvement, growth in existing accounts and a solid capital position.

Growth Projection for ACGL

The Zacks Consensus Estimate for 2024 earnings is pegged at $9.01 per share, suggesting an increase of 6.6% on 15.3% higher revenues of $15.6 billion. The consensus estimate for 2025 earnings per share is pegged at $9.23, suggesting an increase of 2.5% on 9.2% higher revenues of $17 billion. 

The long-term earnings growth rate is expected to be 6.1%. We expect the 2026 bottom line to witness a three-year CAGR of 4.2%.

ACGL’s Northbound Estimate Revision

Six of eight analysts covering the stocks have raised estimates for 2024 while five have raised estimates for 2025.

The Zacks Consensus Estimate for 2024 and 2025 earnings has moved 5% and 1.5% north, respectively, in the past 60 days, reflecting analyst optimism.  

ACGL’s Favorable Return on Capital

Return on equity in the trailing 12 months was 21.4%, better than the industry average of 8%. This highlights the company’s efficiency in utilizing shareholders’ funds. 

Also, the return on invested capital (ROIC) has been increasing over the last few quarters as the company raised its capital investment over the same time frame, reflecting ACGL’s efficiency in utilizing funds to generate income. ROIC in the trailing 12 months was 16.5%, better than the industry average of 6.1%.

ACGL’s Expensive Valuation

ACGL is currently expensive. It is trading at a P/B multiple of 2.09, higher than the industry average of 1.59.

It has a Value Score of B. This style score helps find the most attractive value stocks.

Back-tested results have shown that stocks with a Value Score of A or B combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) are the most attractive, and their returns are better. 

Given its market-leading presence, growth prospects, rising estimates and better return on capital, its premium valuation is justified.

Shares of other insurers like Fidelity National Financial FNF and W.R. Berkley Corporation WRB are also trading at a multiple higher than the industry average. However, shares of CNA Financial Corporation CNA are trading at a multiple lower than the industry average.

What Makes Arch Capital a Buy?

Arch Capital is set to gain from its compelling product portfolio and widespread operations that also provide meaningful diversification and earnings stability. This insurer continues to undertake international expansion, enhance operations and diversify business at attractive risk-adjusted returns. 

The diversification of its Mortgage Insurance business via strategic acquisitions complements the strength of the specialty insurance and reinsurance businesses. 

Amid the high chances of an interest rate cut this September, investment income is poised to improve banking on a growing base of invested assets driven by improving cash flows.

Sufficient liquidity coupled with low leverage has helped ACGL strengthen its balance. It also shields it from market volatility and supports growth initiatives. While cash position improved,  leverage too lowered and compared favorably with industry. A solid liquidity position should support Arch Capital in meeting any short-term obligation. 

Notably, its free cash flow conversion has remained more than 85% over the last many quarters, reflecting its solid earnings. 

Despite its premium valuation, all these positives make this Zacks Rank #2 stock a strong contender for addition to one’s portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.

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