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Among the most famous investors of all time, Warren Buffett is truly a mind worth following. Many in the financial media cover the Oracle of Omaha's trades within his publicly-traded portfolio of stocks held under Berkshire Hathaway ( NYSE:BRK-B ) as well as his off balance sheet holdings, which include many privately-held businesses.
Parsing through his portfolio of publicly-traded stocks, there are currently 47 positions to assess, including Buffett's ownership of Aon ( NYSE:AON ). Over time, Warren Buffet has built a rock-solid insurance portfolio, with the likes of Geico and Aon supported by a range of other names in the space.
Let's dive into why this may be the case, and where analysts see AON stock heading from here.
Why Is Buffett Such a Bull on Insurance Stocks?
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Aon is certainly a run of the mill pick, so to speak, for Warren Buffett. The investing magnate has made his fortune over the years focusing intently on certain industries and sectors where he feels he has an advantage. His so-called circle of competence has grown over time, with Buffett recently taking on various tech picks. But by and large, his view has long been that insurance is a great business to be in. That's largely due to the fact that companies like Aon, a British multinational insurance and professional services company, generates premiums from its customer base, and can invest that float over time.
The ability to amplify returns on a particular float is what interested Buffett. If he could find a way to beat the market, his insurance companies could outperform. And while he struck it big with some takeover deals in this space, his view has been that diversifying into other companies with good capital management processes already in place could be an easier and more replicable business model. He's been right over time.
Why Are Some Analysts Bullish on AON Stock?
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Aon has been a strong performer in the finance world, consistently beating earnings projections and providing upbeat guidance moving forward. However, despite recent strong earnings, which have lowered the company's forward earnings multiple to just 20-times , concerns have been starting to build around the company's ability to raise prices moving forward. Insurers like Aon have benefited in this post-pandemic environment, raising prices to better reflect future risks. But with long-dated yields coming down, that's not necessarily a good thing for insurance companies that need to match future liabilities to investments.
Accordingly, it's perhaps no surprise to see that the consensus estimates for AON stock is for a decline over the next year of around 4%. The most bullish analyst projection is for the stock to appreciate nearly 23%, but that's an outlier. For all intents and purposes, the Street is generally bearish on this stock, viewing it as fully valued.
But I do think there's a reason to side more with the bullish analysts on this name than those who think the world is going to end. For those who remember the pandemic era, and what that did to the valuations of top insurance companies, it wasn't a great time to be an investor. But perhaps cheaper prices may entice investors like Buffett back into these names, particularly if they're looking to expand exposure to more defensive options in an increasingly uncertain environment.
The Verdict
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In my view, the market is taking a cautious approach to Aon, and the insurance industry in general, as it probably should. We're likely due for some volatility moving forward. But that's not necessarily a bad thing for investors looking for a deal. And if analysts are correct in their assumptions that this stock could head lower in the intermediate term, I wouldn't be surprised to see the smart money (such as Warren Buffett and other institutional investors) jump in. That's the way things tend to go - the best investors buy at discounts.
Over the long-term, AON stock certainly looks intriguing. This is a company with the blessing of Warren Buffett, and that's hard to get. So, for those looking for a stock to buy amid heightened volatility and recession concerns, strapping in and buying on the way down may be the way to go with this one.
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