An Under-Followed Way to Bet on a Housing Rebound

Essent Group is a large player in issuance of private mortgage insurance (PMI). PMI is required by most mortgage originators of buyers putting up less than 20% of the purchase price of the home at closing. ESNT has an enviable long-term growth profile as shown below. Since 2013, book value compounded at close to 20% annualized. Total insurance in force grew steadily as well. Earnings per share grew nicely during each year with the exception of 2020, when Covid lockdowns hurt real-estate showings. From 2014 through 2022 all major metrics improved dramatically. EPS surged by over 649%. Book value quadrupled. Cash dividends were initiated in 2019 and were raised each year since. Continuous shareholders did okay, but 2022's overall market selloff knocked the shares down from an April 2021 peak of $54.22 to just $34.27 last September. ESNT has rallied since then. It closed last week at $43.50. A typical price-earnings multiple for ESNT has run about 10.6x, accompanied by around 1.42% in yield since 2019. At $43.50 those numbers sat at just 6.9x the stock's 2023 EPS estimate and 2.30%. Simply reverting to a still-subpar 10x P/E would take ESNT back up to $62.80 or so by the end of 2023. Times when ESNY has been popular (red-starred below) traders often paid well above its typical multiple. Every previous sojourn to single-digit P/Es (green-starred) served as springboards for very tradable upturns. ESNT ran from $16.49 at its 2016 nadir to $47.29 near the end of 2017. It jumped from $31.08 in December 2018 to $55.84 one year later. ESNT got crushed in the Covid panic, plunging momentarily to $17.50. Around 12 months later it could have been sold at north of $54, more than triple where the rebound started. Price-to-book value is a factor I do not typically emphasize. In ESNT's case, though, its super-low valuation on that metric makes it a key positive right now. From 2014 through 2022 the stock's average premium-to-book value was 160%. During both 2014 and 2015 ESNT fetched more than 200% of book value. As of Feb. 19, 2023 ESNT was trading at a 7% discount to its estimated Dec. 31, 2023 book value. I sometimes talk about reverse engineering the current dividend rate to normal as another way to compute a theoretical goal price. In Essent Group's case converting the $1 per share annual rate to 1.42% would mean seeing ESNT rise to $70.42. In my world ESNT is a low-risk name that could deliver very substantial total returns over the coming year. Yahoo Finance calls the shares undervalued, yet only looks for a bounce to 447.56 by this time next winter. That goal is way too conservative, in my view. It assumes ESNT will only command 7.8x Yahoo Finance's Street-low estimate for ESNT for 2023. Research house Morningstar also calls ESNT undervalued. It does not provide a year-ahead price target but does state they think ESNT is worth $48.23 right now. As with Yahoo Finance that number seems too low to us. ESNT peaked at $50.08 to $55.84 during each of the last full calendar years. ESNT's 2022 operating results were the best so far. FAST Graphs' impressions of ESNT's potential are more in line with my own. They call 12.49x as its normalized multiple. Assume the stock just trades back to 140% of book value and ESNT could reach $65.41. Figure on ESNT reverting to a still-below typical (for FAST Graphs) 12x P/E and the shares could be north of $73. If the somewhat pessimistic views on ESNT prove correct you will likely pocket 12-month total returns of 10% to 13%. There would be no harm if that is all you get. If ESNT moves more in line with what I, and FAST Graphs, see coming, year-ahead results could easily exceed 50%. Higher real-estate prices mean fewer people than previously will be able to pony up at least 20% down payments when they buy. That bodes well for the basic business service that ESNT provides. ESNT is a buy with a trading exit point of $60 or higher if things unfold as projected.

An Under-Followed Way to Bet on a Housing Rebound

In my world this low-risk name could deliver very substantial total returns over the coming year.

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