Aviva plc Could Be Worth 513p

Aviva (LON: AV) (NYSE: AV.US) has been one of my best performing stocks in recent months and, as such, I think it could be time to put more faith in this insurance gem.

Indeed, market sentiment has been extremely strong since the new management team took over. The market has bought into their plans to turn the company around, even understanding the reasons why the dividend had to be savagely cut (after an initial fall in the share price).

Therefore, I feel that now could be a good time to stick to my investment philosophy of ‘cutting your losers and letting your winners run’. Aviva has certainly been a winner for me of late, so now seems like a good time to increase my stake, now that a dividend cut has taken place and management have got their feet under the table.

Can the positive sentiment continue? I believe it can: up until now the market has been reacting positively to what Aviva says it can do, so I would expect there to be further optimism should the company start to actually deliver on its aims. As such, I don’t feel that market sentiment has yet peaked for Aviva, meaning there could be some more share price gains to come.

Indeed, I don’t think that shares are expensive at the moment. In fact, in my view they continue to offer good value and could be worth as much as 513p.

For instance, shares currently trade on a price-to-book (P/B) ratio of just 1.5. This means that investors in the company are paying just £1.50 for every £1 of net assets in the business. In other words, buyers of the shares are paying a relatively small amount of goodwill for their slice of the company’s net assets and this is good news because, in reality, those net assets are worth considerably more than their book value as a result of the profit they are able to generate.

So, a relatively low P/B not only indicates good value but is a highly relevant ratio for an insurance company, such as Aviva, to be judged on. Indeed, even though market sentiment has been strong and shares have performed well, the P/B ratio indicates that shares could have further to go.

In my view, Aviva deserves to trade on a slight discount to its sector P/B (life insurance) due to the recovery play that Aviva undoubtedly is. With the life insurance sector trading on a P/B of 2.0, a 10% discount to this seems fair (i.e. a P/B of 1.8) and this would equate to a share price of 513p, meaning shares could offer upside of just under 19% versus their current share price of 432p.

However, as good as Aviva is, it does not make the cut for The Motley Fool’s top 5 share picks, as featured in a report entitled 5 Shares You Can Retire On.

The report is exclusively available to Motley Fool readers and is completely free and without obligation. The 5 stocks it features contain an exciting mixture of growth prospects, decent yields and great potential for share price gains.

Of course, you may already one or more of the 5, but there could be one or two companies in there that you’ve overlooked and that could give your portfolio a boost in the run up to Christmas.

Click here to take a look at the report.

> Peter owns shares in Aviva.