We closed this position on February 27, 2018. A copy of the associated Position Update report is here.

The Travelers Co (TRV) is my stock pick of the week as well as one of November’s Most Attrac­tive Stocks, a monthly newsletter from New Constructs.

Like all of our Most Attrac­tive Stocks the com­pany has (1) high and ris­ing eco­nomic prof­its (as dis­tinct from account­ing prof­its) and (2) a cheap val­u­a­tion. As shown in our free report on TRV, the company’s return on invested capital (ROIC) (11%) is in the second quin­tile of all the com­pa­nies we cover and its eco­nomic earn­ings are grow­ing faster then reported accounting earnings. During its lat fiscal year, TRV’s economic earnings rose by $827mm while accounting earnings rose by only $673

At the same time, the stock’s val­u­a­tion implies that TRV’s prof­its will decline by 30% and never grow again. In other words, the stock mar­ket is pre­dict­ing a per­ma­nent decline of more than 30% in TRV’s prof­its. Given that most investors are not aware that the company’s operating profits are as strong as they are, the market is probably not giving TRV appropriate credit for its profitability.

In summary, the mar­ket is set­ting the profit growth bar quite low for this stock.


  1. About $29 million in non-operating expenses (after-tax) cause reported earnings to be understated.
  2. Our dis­counted cash flow analy­sis shows that TRV’s cur­rent val­u­a­tion (stock price of $55.49) implies that the company’s prof­its will decline by 30% and never grow again.
  3. The com­pany grew its eco­nomic earn­ings by $827mm dur­ing its last fis­cal year.

For details on what causes the dif­fer­ence between eco­nomic ver­sus account­ing prof­its, see Appen­dix 3 on page 10 of our report on TRV. See Appen­dix 4 to learn how TRV increased net operating profit after tax (NOPAT) by cut­ting costs and increased its NOPAT mar­gin from 11.7% to 14.8%. See Appen­dix 5 for details on how TRV grew invested cap­i­tal while slower than revenue and also raised its invested cap­i­tal turns from .72x to .74x. Appen­dix 7 (in the ROIC sec­tion) shows how the com­pany’s increase in NOPAT mar­gin and invested cap­i­tal turns result in an increase in ROIC (from 8.4%% to 11.0%) and eco­nomic earnings, which rose by $827mm.

In summary, TRV is gets our “very attractive” stock rating because its economic earnings are strong and growing while its valuation implies economic earnings will decline permanently by 30%.

TRV fits the risk/reward pro­file of a great stock to buy.

Note: Stock pick of the week is updated every Tuesday.

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