W.R. Berkley Corporation is a high-quality founder-led property/casualty insurer, headquartered in Greenwich, CT. The company went public half a century ago and has been beating the market for years. While the S&P 500 is up 520% from its 2009 bottom, WRB stock has gained 644% over the same time period.
Year-to-date in 2023, however, WRB is down 15% versus the 8.2% gain for the stock market index. Underperformance by a quality stock such as this one is usually seen by investors as a buying opportunity. But before joining the bulls, we glanced over W.R. Berkley’s weekly price chart. Unfortunately, its Elliott Wave implications quickly put us off.
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It looks like WRB stock has just completed a five-wave impulse pattern. We’ve labeled it I-II-III-IV-V, where wave II stands for the 2008 Financial crisis, while wave IV coincided with the Covid-19 panic of March, 2020. The rest of the chart depicts the fifth and final wave, whose five sub-waves are also visible and marked 1-2-3-4-5.
If this count is correct, the tumble we saw in Q1 must be the beginning of the negative phase of the Elliott Wave cycle. Every impulse is followed by a correction, which usually erases most or all of wave V. In the case of WRB stock, a decline back to the support of wave IV in the mid-to-low $30s makes sense. From the current price of $61.50, that would be a 40% to 50% drop.
The bulls would be quick to point to the company’s stellar fundamentals and low P/E ratio. Insurance is a very cyclical business, though. Cyclical companies often look best and cheapest just when their business cycle is peaking. That’s when their profits are the highest they’ve been. Given the increasing likelihood of a recession, however, we don’t think these profits are representative of things to come. In our stock portfolio we’ve included 18 companies we like better than WRB stock.
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