How To Profit From a Late Summer Rally (MET)

With General Electric (NYSE: GE) raising the company’s dividend by 20% today and European regulators issuing a comprehensive list of exposures for member countries' banking systems, the market has moved higher—notably higher. Currently the S&P 500 (NYSE: SPY) is up by 7 points, trading above the 1,100 level; this is notable, given that 1,100 is a key technical level.

With the market now regaining the 50-day and 200-day moving averages, on decent volume as well, this has put quite a few shorts and underinvested longs in a bind. Throw in the fact that the market looks to have formed a reverse head and shoulders bottom over the past three months (with a potential near-term upside target of 1,173-1,200, 7% to 10% higher from here) and it is entirely possible that the market moves higher over the next three months.

This begs the question, “What’s the best way to play a rally into the end of the year?” Some theories suggest that traders buy into the best run, highest quality names; some theories suggest traders buy what has already worked this year. Others suggest high-beta plays. In reality, what traders need to think about are individual names with individual stories. The time has clearly passed when market participants can play blanket sectors or overall themes.

Here is one name to consider loading up on, on the heels of the next bull leg higher…

Metlife (NYSE: MET): with a book value of $41.00, a forward P/E ratio below the industry average (7.42x), a yearly growth rate of 17%, brand name recognition that any CEO would kill for, and a sales staff better than most in the industry—this is simply my top pick. While MET does have some lackluster variable products on its books, it has far less than its competitors and, in an upward-trending market, those assets actually add back to stock value exponentially.

Metlife also has some of the best risk managers in the business. In recent quarters, when others lost billions on interest rate depreciation and stock market volatility, MET actually booked gains on their hedges in these same areas.

The technical picture is bullish for the name as well. The stock has been consolidating lower over the past three months, which gives it clearly defined risk/reward patterns. The stock clearly has support at $37.50 (with even greater support at $35.00) and has resistance near $40.00, which just so happens to be the 50-day moving average. In a positive stock market environment, breaking out of that range to the upside is inevitable. The near-term upside potential sits at $45.00.

In addition to short term catalysts and price targets, MET also has long-term valuation on its side. Currently, as mentioned above, the stock is trading at a discount to book value. While stocks often do deserve negative multiples to book value, this usually occurs during times of great stress, like the period of time we have just experienced. Simply, the market hasn’t realigned market values for the stock because it is unsure of whether the economy is bottomed out. However, MET’s book value has actually INCREASED over the past year and a half, while others have decreased, showing that its book has clearly bottomed. Factoring in the ten-year historical multiple for the multi-line insurance industry of 1.40x book value, you have a long-term price target of $57.40. That assumes no EPS growth, which, as stated above, is estimated to be 17% per year for the next five years.

Don’t forget that Metlife pays a 1.88% dividend yield as well, which is better than a money market can yield right now, and has increased its quarterly yield over the last four years by over 42%.

Investors and traders alike should look to add this name to their portfolio. For those that understand options strategies, here’s a great way to play the name. Buy half your position in stock at these levels and then sell the January 2011 $50/30 strangle for $7.15. This gives you a max gain (should the stock rise and shares be called away) of 20% over the holding period, which equates to a yearly gain of over 40%. If the stock moves lower, your cost basis would be $30.75, a discount to the current trade price of 21.94%.