At the beginning of April, when asked to find an undervalued stock, I picked Swiss insurance and reinsurance giant Chubb (CB 0.47%). Not long after that article was published, it was revealed Warren Buffett was accumulating shares, picking up around 26 million shares of the company.
I certainly can’t argue with Buffett’s logic or his selection of the company. As a result, when again posed with the question of finding an undervalued stock for this month, I’m reupping my suggestion to consider Chubb. Could this undervalued stock make you a millionaire one day? Perhaps; read on to find out why that just might be the case.
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The value is still there
Wall Street’s analysts have adjusted their expected per share earnings growth rate 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 built to value the company at $324.04 per share back in that April article.
As a result, I’m holding my valuation estimate steady. With Chubb’s shares recently trading hands at $265.15 each, they can increase by around 22% before they reach that fair value estimate. That’s a reasonable boost by itself. On top of that potential gain, Chubb offers investors a 1.4% yield, adding a bit of current income as they wait for the market to make its move.
In addition, the discounted earnings model that created that valuation estimate was built using a discount rate of 12%. That discount rate represents the anticipated rate of return an investor could expect over time if they bought the company at its fair value estimate and it delivered in line with those projected earnings.
In other words, if the company’s shares do increase to that fair value estimate, investors still have a good reason to believe they can continue to get a decent return beyond that point. Like any investment, of course, the future is uncertain and depends heavily on how the company’s operations actually perform.
Still, it’s good to know that there’s a path forward — built on reasonable assumptions — where investors have a decent shot of seeing a solid long-term return as an owner of Chubb’s stock. Back that up with Buffett’s recently revealed significant ownership stake, and the risk versus potential reward balance makes it at least worth serious consideration.
Get stared now
Of course, in the modern market, it’s rare for a company to stay value priced for long. Add the prestige of being part of Buffett’s portfolio to the mix, and Chubb’s days as a value priced stock may very well be numbered.
Indeed, Chubb’s shares are up a bit since my previous article published in April. As a result, while it still looks value priced today, there’s less of a potential bargain in its shares than there was just a few weeks ago.
So make today the day you take the first step toward deciding whether its shares deserve a spot in your portfolio. If you buy and end up being correct, you just might find it plays a valuable role in your quest to reach millionaire status. If its shares don’t perform well, at least you’ll know you’re in good company when you can count the likes of Warren Buffett among your fellow recent buyers of its shares.
Chuck Saletta has no position 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.