One of my Favorite Stocks for This Year Could Double

Since the fall of last year, investors have sent most financial stocks plummeting, regardless of the underlying strength of the firm’s business prospects. But what has been a period of unadulterated selling so far could spell big opportunity for smart investors who buy shares of financial firms with solid footing and a game plan for growth.

That’s why I’ve got my eye on insurance giant MetLife (NYSE: MET). The insurer sells life, disability and just about any type of insurance, as well as annuities and other financial products. On Dec. 27, 2011, the company announced it would be selling its banking operations to GE Capital Financial, the financial unit of industrial conglomerate General Electric (NYSE: GE). GE will acquire about $7.5 billion in deposits, while MetLife will transfer another $3 billion out of its MetLife Bank to GE within the next six months.

MetLife’s banking operations are small potatoes, given the company boasts about $500 billion in its investment portfolio. This makes it one of the largest financial institutions in the world. But owning a bank brought MetLife under the strict regulations of the U.S. Federal Reserve, which happened to deny MetLife’s plans to boost its dividend and share buyback plans this past October.

By jettisoning the banking businesses, MetLife is likely to have much more flexibility to run its insurance operations because it won’t be subject to these regulations anymore.

MetLife is a global giant, with 90 million customers in 60 countries, including 90 of the largest 100 firms in the Fortune 500. The North American and Asian regions make up the vast majority of its operations, with the United States estimated to constitute 65% of the $46 billion in premiums the company expects to collect for all of 2011. International premiums will account for the rest, which is primarily in Japan and the rest of Asia.

It’s important to note that Europe is of little concern to the company in terms of its operations, so the potential impact of the European debt crisis would be minimal. In a year-end presentation to investors, management detailed that European premiums represent only about 1% of its total investment portfolio.

Relevant or not, fears over Europe’s economic scenario and the banking sector in general have opened a great opportunity for value investors: As an out-of-favor stock, it has been knocked into the bargain bin.

MetLife’s operations are on firm footing and growing. Premium growth is expected to jump more than 30% in 2011, which is due to a savvy move to acquire some of the Asian insurance operations of troubled rival AIG (NYSE: AIG). Going forward, premium growth at MetLife should be decent and average in the mid single-digits. It could grow close to 5% in 2012.

MetLife currently anticipates roughly $46 billion in sales for 2011, a nice improvement from the $35.2 billion the company registered in 2010. Operating earnings are projected to reach at least $5.2 billion. This equates to roughly $5 in earnings per share (EPS), or about 10% ahead of 2010 levels.

At a recent $32 per share, MetLife trades at only about 64% of book value, which is simply too low (a general rule of thumb is that a financial firm trading right at book value marks an appealing entry point).

For 2012, the company expects profits closer to $5.20 per share and intends to grow book value by a couple of dollars to more than $50 per share. This would work out to a return on equity (or book value) of more than 10%. Management has goals to boost return on equity (ROE) to around 12%, and then closer to 15% within the next five years.

Risks to Consider: MetLife is still feeling the effects of financial market volatility. Its huge investment portfolio depends on stock-market returns and bond interest rates. But it also consistently pays off insurance claims and returns earnings to shareholders.

Action to Take -> Overall, MetLife is growing briskly, despite low interest rates and a tough regulatory market. With the coming sale of MetLife Bank, the company can further enhance returns for investors. Increasing the dividend from a current dividend yield of 2.4% should appeal to income-minded investors, while the company’s stock buyback plans can boost EPS even more.

As one of the largest insurance firms in the world, I believe a premium to book value is warranted for this stock. Combined with growth in Asia and goals to boost ROE, I estimate a stock price of at least $60 per share within a couple of years — almost double where they sit now. A nearer-term share price rally could also occur once the market realizes that European and banking fears have little ability to dent the strength of MetLife’s business, or its potential to grow respectably going forward.

For these reasons, MetLife is my top financial stock pick for 2012, and probably for the next three to five years.