Three surprise power plays: Direct Line Insurance Group plc, Smith & Nephew plc and Legal & General Group plc

Sometimes you can find strength in surprising places. The following three stocks all pack a lot more punch than you might think.

Direct action

Direct Line Insurance Group (LSE: DLG) is a household name that needs no introduction to its motor, household and commercial insurance customers. However, investors may need reminding of exactly how rewarding it has been since its 2012 IPO. It has delivered share price growth of a whopping 77% over the past three years, while the FTSE 100 fell 5% over the same period. The share price has now more than doubled from its 170p flotation price to today’s 375p.

Direct Line’s Q1 trading statement shows gross written premiums up 4.2% year-on-year, with its two key lines, motor (46% of premiums) and home (26%), both growing steadily. This more than offset a drop in premiums from its rescue division, which makes up just 12% of its premiums. Direct Line has outpaced rival insurers share-price-wise and although the dividend is less than spectacular at 3.68% there’s scope for progression. Motor insurance premiums are rising sharply across the board after two years of falls, which should help margins. At 14.06 times earnings Direct Line isn’t overpriced either.

Keeping up with the Smiths

Medical appliances maker Smith & Nephew (LSE: SN) is a surprise share price growth smasher, returning 57% over three years and 76% over five, without always getting the acknowledgement it merits. I’ve long recognised its strengths, it’s a fixture in my portfolio, and it has already more than doubled my money. Yet growth has slowed lately, partly due to currency headwinds, and partly due to the emerging markets slowdown that has hit sales, notably in China. That only makes it longer-term share price growth more impressive.

I bought Smith & Nephew as a way of playing the greatest long-term demographic challenge facing the developed world and emerging markets: ageing populations. Hip replacements, knee surgery, chronic wounds… I won’t go on but this is the future for more and more of us. The cash is flowing into the company’s coffers, with Q1 revenue of $1.14bn up 4% on an underlying basis. With the company now trading at a pricey 20 times earnings and yielding 1.74% it looks more like a buy than a hold right now, but I will certainly be holding.

General strikes

Insurance behemoth Legal & General Group (LSE: LGEN) is another unsung growth hero, its share price up 105% over the past five years. Unlike these other two stocks it has suffered slippage over the past 12 months, falling 12%. As a specialist in index-tracking products, it was inevitable that L&G’s share price would passively follow the stock market down when investor confidence shrank, as it has done lately.

I think this is more of a buying opportunity than a threat, as this well-managed company will equally rebound when sentiment inevitably returns. Annuity sales have been hit by Chancellor George Osborne’s pension freedom reforms but L&G has offset this by expanding bulk annuity sales, taking a 20% share of the auto-enrolment market, and casting its eyes overseas. Trading at 12.96 times earnings you’re getting the stock at a discount, and the rip-off roaring 5.76% yield is safer than many on today’s index. The income flows should keep you warm while you wait for stock markets to catch fire again.

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Harvey Jones owns shares of Smith & Nephew. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.