Essent Group: A Stealthy 'Left to Right' Growth Stock

What valuation do you think is fitting for a stock which grew earnings per share by over 660%, initiated and raised its dividend four times in four years and more than quadrupled its book value since 2014? I'm betting you're not thinking of a single-digit price-to-earnings ratio. That is exactly what is available now on the shares of Private Mortgage Insurance issuer Essent Group . As of Sept. 8, 2022, it sold for just $39.60 on expected 2022 EPS of $7.86. That is just 5 times this year's estimate and came accompanied by about 2.22% in current yield. Those metrics compare with a more typical P/E of about 10 times and a yield of around 1.46%. Continuous shareholders over the past eight years have done okay, pocketing 80.2% in total return, yet that paled in relation to the huge wealth creation which already occurred. Situations like that tend to precede large catch-up moves higher as the difference between value and price are arbitraged away over time. Essent gave traders chances to sell above $50 during each of the past five years including 2022 year to date. Simply rebounding to that very modest goal would deliver greater than 25% plus dividends from the current quote. A rebound to a more typical 10 P/E could easily send Essent to north of $78, almost double what its shares are available for right now. All but one of the previous six best entry points for traders (green-starred below) launched their rallies from higher P/Es than todays. The lone exception was only applicable if you caught the exact to-the-penny low during the covid-panic of 2020. Intrepid buyers back then saw their shares surge from $17.50 to $54.22 (+ 209.8%) over the next year or so. Essent's balance sheet is quite healthy. Long-term debt was just 9% of capital at the end of 2021. The stock now sells for less than expected year-end 2022 book value. Yahoo Finance takes a super conservative view on Essent even though they call it undervalued. Its 12-month goal price of $55.50 still implies upside of 40.1% plus dividends by this time next September. Independent research house Morningstar labeled Essent a 4-star, out of 5, buy. They are unwilling to make year-ahead projections but do indicate about a 20% rise is likely simply bouncing back to what they call present-day fair value. As with Yahoo Finance, that goal appears too low. As already noted, Essent changed hands substantially over $46.57 during each of the most recent five years including 2022 YTD. Quantitatively-based FastGraphs thinks 13.2 times earnings is more typical of what Essent typically commands. That sounds a bit high to me based on history, but it's not at all aggressive based on sustained earnings growth since 2014. Even 10-times FastGraphs' 2022 estimate would lead to a $77 target price. That would equate to almost 100% from here if it takes a full year to get there. Options on Essent are available as far out as either Jan. 20, 2023, or April 21, 2023. Selling naked puts or even purchasing call options might be very good moves considering where Essent might be by then. Essent is one of a bevy of under-followed smaller-cap stocks that boast excellent fundamentals and show proven growth over time. That is not unusual in dicey market conditions when the only buy recommendations seem to come on large-cap, high-quality, and blue-chip names. Buy some Essent shares, sell some naked puts or consider doing both.

Essent Group: A Stealthy 'Left to Right' Growth Stock

Essent is one of a bevy of under-followed smaller-cap stocks that boast excellent fundamentals and show proven growth over time.

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