Why MGIC Investment Shares Roared Higher
Jul 23rd 2013 2:45PM
Updated Jul 23rd 2013 2:52PM
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of MGIC Investment , a mortgage insurance company to lenders and government-sponsored entities, jumped as much as 15% after handily topping Wall Street's earnings estimates in the second-quarter.
So what: For the quarter, revenue fell 18% to $263.9 million, but the company surprised Wall Street by reporting a profit of $0.04 per share. This easily reversed its year-ago loss of $1.36 per share and trumped the Street's forecast of a $0.15 per-share loss. Furthermore, new insurance written jumped 36% to $8 billion from the year-ago period while delinquent loans, excluding bulk loans, dropped to just 10.16% from 12.51% at this time last year.
Now what: The big catalyst for MGIC has been an improving housing market where low lending rates have spurred homebuyers to once again take the plunge. Years removed from the financial crisis, credit quality has also improved for many consumers, meaning a decline in the number of delinquent loans. However, with MGIC still only slowly removing itself from bad legacy loans and interest rates already beginning to rise, what benefits it sees from an uptick in new business underwritten now may be very short-lived. Let's not forget we're talking about a company that hasn't turned in an annual profit since 2006 and recently diluted its shareholders in a big way in order to raise cash and reduce its risk-to-capital ratio, which its own CEO, Curt Culver, suggested would get worse before it gets better. Despite today's surprise profit, this is a company I'd suggest staying far away from.
With so much of the financial industry still getting bad press these days, it may be a greedy-when-others-are-fearful moment. Not surprisingly, some of Warren Buffett's biggest investments are in the space. In the Motley Fool's free report, "The Stocks Only the Smartest Investors Are Buying," you can learn about a small, under-the-radar bank that's too tiny for Buffett's billions. Too bad, because it has better operating metrics than his favorites. Just click here to keep reading.
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