Is Brighthouse Financial an Underrated Financial Stock Investment Play?

Brighthouse Financial (NASDAQ: BHF) is a relatively young company, but it has a rich history. That's because it's basically the former consumer life insurance arm of MetLife (NYSE: MET), from which it was spun off in 2017. However, the history here is about to include another twist, as the company has agreed to be bought for $70 per share in cash.

The basic life insurance model

Life insurance is interesting because a company like Brighthouse Financial collects premiums upfront and pays out on policies in the future. That means it has the cash to invest in the meantime. This cash is often called the float. If the company is investing well and Wall Street is in a bull phase, life insurance companies can make a great deal of money.

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Unfortunately, Brighthouse Financial's results as a stand-alone business haven't been particularly consistent. Revenue and earnings have been extremely volatile, with increasing death rates during the coronavirus pandemic a clear headwind to its business model. However, right now, none of this really matters all that much for investors.

The big story is that Brighthouse Financial has agreed to be acquired by Aquarian Capital for $70 per share in cash. Shareholders have already approved the deal, but it still needs to get final regulatory approval. The stock's current share price is hovering around $64 per share.

Brighthouse Financial is a special situations play

Given the spread between the current stock price and the acquisition price, investors could earn about $6 per share if they buy Brighthouse Financial while it's trading at $64. That's a gain of roughly 9%, with the deal expected to close sometime in 2026. That isn't a bad return given the short time horizon.

From that perspective, it looks like Brighthouse Financial is underrated right now as an investment. The risk is that the deal falls through. If that happens, the stock will likely decline back to its level before the merger agreement, which was around $48 a share. That would be a 25% decline in price. The spread between the current price and the merger price is quite wide, so Wall Street is clearly worried that the acquisition could fall through.

Only more aggressive investors should buy in

At this point, emotions and news are driving Brighthouse Financial's stock price. Only more aggressive and active investors should buy it. And if you do, you need to strongly believe that the pending acquisition will be completed as planned, because there's notable downside risk if it isn't.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.