On Jan 13, the shares of MGIC Investment Corp. (MTG) hit a new 52-week high of $8.88 per share. The momentum in the stock was driven by a recovery in the U.S. housing market which directly benefits the mortgage insurer.
The company, having suffered huge losses in the past several quarters, finally started experiencing profits second-quarter 2013 onward, led by improvement in the housing market, lower delinquencies and a pick-up in mortgage insurance demand. The stock price has nearly tripled over the past one year.
Management at MGIC is encouraged by the recovering demand for home purchases. It anticipates that since the majority of purchases that need a mortgage do not require a 20% downpayment, the company is poised to benefit from this market opportunity.
MGIC also continues to regain market share from the Federal Housing Authority. However, the pace of recovery has been slower than expected given the differences in underwriting guidelines, loan level price adjustments by the GSEs, and the secondary market benefits associated with government-insured loans versus loans insured by the private sector. Other private mortgage insurers like Radian Group Inc. (RDN) and Genworth Financial Inc. (GNW) have also benefited from the improving industry trends.
MGIC is expected to perform favorably in 2014 due to an increasing market share from FHA, declining delinquency as well as continuing improvement in the housing market.
The Zacks Consensus Estimate for earnings for 2014 is currently pegged at 45 cents per share, which translates into a potential year-over-year improvement of 268.8%.
However, valuation for MGIC looks stretched. The shares are trading at premiun to the peer group average both on a forward price-to-earnings basis and price-to-book basis. Return on equity, on the other hand, is negative compared to positive peer group average.
While MGIC has a Zacks Rank #3 (Hold), a better-ranked insurance stock, CNO Financial Group, Inc. (CNO) with a Zacks Rank #1 (Strong Buy) is worth considering.
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