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2 FTSE 100 stocks I’m buying before the market comes to its senses!

If you were to ask me for my favourite stocks in the FTSE 100 today, I would have to list Prudential (LSE: PRU) as one of my top five. There’s so much to like about this business, but the market seems to be overlooking its real potential. 

I think this is a mistake and it could only be a matter of time before investors realise what is on offer here and rush to buy back into the company. 

So, here’s why I’m buying Prudential before the market comes to its senses.

Global growth

Prudential is a truly global operation. Its Asian division has grown to become its most prominent and most successful business over the past decade, and analysts don’t see this part of the group slowing down any time soon. 

However, the share price has been held back by the company’s exposure to the slower growing UK market.

The good news is, last year management announced plans to split off its UK business from its US and Asian operations, both of which I believe have much more than long-term potential. The UK business will comprise asset manager M&G, which currently manages around £351bn, and its UK-focused insurance and pension business.

Management believes Prudential could be worth more as two separate businesses rather than staying together as one. The City seems to agree. Analysts think the stock could be worth more than 2,000p a share when broken up. I have also heard rumours that Lloyds Banking Group could be interested in taking over the separated UK business. Meanwhile, Chinese insurer Ping An has been touted as a potential acquirer of the Asian unit.

These rumours and Prudential’s impending break-up lead me to conclude the enterprise will be worth substantially more in several years than it is today.

Outstanding track record 

Another leading FTSE 100 stock that has recently caught my attention after sliding 16% is insurance group Hiscox (LSE: HSX)

Over the past five years, this company has consistently proven itself as a profit engine, and the stock has smashed the broader market. For example, over the past 15 years, shares in Hiscox have yielded a total return of 14.8%, a performance that helped the firm achieve a place in the FTSE 100 last year.

Recently, however, the stock has come off the boil as analysts have turned more cautious on its outlook. In October last year, the City was forecasting earnings per share (EPS) of just under 80p for the group for 2018. Now, the average earnings target for 2018 is 41p, a drop of nearly 50%.

Because insurance is a relatively unpredictable business, this kind of earnings volatility isn’t unheard of. Looking back at Hiscox’s own earnings record, I can see at least one year in the past five where EPS fell more than 90%, and at least three years of 20%+ EPS growth. Indeed, even though analysts have revised down their forecasts for 2018, they are still expecting year-on-year growth of more than 300% because 2017 was an unbelievably lousy year for the insurance industry.

This kind of volatility might put some investors off, but considering Hiscox’s history of generating wealth for investors, I’m not one of them. I think now would be the time to buy the stock and take advantage of recent declines. To sweeten the deal, there’s a dividend yield of 2.4% on offer as well.

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Rupert Hargreaves owns shares in Prudential. The Motley Fool UK has recommended Prudential. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.