It's a Kind of MGIC: This Insurance Provider Is Up, but Still Cheap

Founded in the 1950s, MGIC Investment is the industry leader in providing private mortgage insurance (known as PMI) to property buyers who put down less than 20% of the purchase price at closing. Sales of PMI are closely tied to the overall rate of property sales. That trend is a major tailwind for MTG right now, suggesting strong results are likely to be on tap. Due to the cyclical nature of real estate sales and a high beta (1.55-times) MTG has always been an outstanding trading vehicle. The graphic below details the stock's large swings since its July 2015 peak. Every major decline has been followed by an even larger percentage rebound. MTG's most recent top occurred just days ago when it hit an intra-day price of $13.83. As of Monday, it once again changed hands as low as $11.74. That short-term 15.1% pullback provided the latest trading opportunity for those who missed it when I wrote about it last August, at $8.35 per share. Back on Aug. 3, MTG was offered for just 4.3-times what was then projected for 2020 EPS, accompanied by a generous 2.87% yield. My 6-month target price was $15.60 based on Value Line's $1.95 estimate for MTG at that moment. It's now almost exactly six months later. Estimates for 2020 came down to $1.30 but the stock rose nicely anyway. Last August I published this snapshot of MTG's March 19, 2021 $9 strike price options. Anyone who sold those $9 puts for $2.10 per share is looking likely to pocket 100% gains next month. Shorting 10 contracts would have been a commitment to own 1,000 shares at a net cost of just $6.90 per share. You can't make anybody give those shares to you. You will, however, make $2,100 upon expiration unless MTG falls below $9 over the coming 45-days. I spotlighted a March 19, 2021 $9 buy/write combination on MTG in my previous article. From publication day through Monday, MTG had gained $3.63 per share or 43.5% from that trade inception price. Traders who set up the combination trade are looking good to pocket 78.2% total returns next month as long as MTG holds at $9 or better. Buy/writes like this one work out quite well most of the time. Even the worst-case scenario provided 16.9% downside protection, which now appears unlikely to be needed, all the way down to $6.99 per share. How does the stock look now, at $11.97 per share? Value Line's new full page report was just released. It now sees 2021 EPS coming in at $2.25 putting the stock's forward multiple at just 5.3-times. Barring last winter's Covid-induced panic low, MTG has never been more cheaply valued. As simple return to about 9.3-times this year's estimate justifies a 12-month goal price near $21. I would be remiss if I didn't note that Yahoo Finance carries a much lower, $1.66 per share EPS estimate for this year. 9.3-times its projected earnings would suggest about $15.44 by this time next year. Reaching even that more conservative target, though, would still deliver north of 34% from MGT's Monday closing quote. Want a tie breaker? Independent research house Morningstar, which does not make year-ahead projections, calls MGT's present day fair value as $13.67. Whomever you believe most, it seems pretty much assured that MGIC Investment Corp. will increase in value over the coming year. Here were actual quotes on MTG and its Jan. 21, 2022 expiration date $15 options as of Monday with the shares at $11.98. You could simply sell those $15 puts for $4.50 while setting your maximum gain at $450 per 100-share commitment. Your worst-case, forced purchase price would be set at $10.50, $1.48 per share or (-12.3%) lower than the trade inception price. Traders comfortable with buy/write combinations could set up the following trades. At 4 p.m. on expiration day there are just two possible outcomes. MTG will close at $15 or higher, or below $15. If the former situation plays out, the following actions would take place. Any upturn of at least 25.2% would generate an amazing 168.3%, cash-on-cash, total return in just under one year. How's that for magnifying a moderate 12-month gain? What if MTG is still stuck below $15 next January? Barring a major problem, even that prospect is not daunting. You'd end up with a double-sized position in MTG. Plus, a further $15,000 in cash would be needed to pay for the extra shares. The good news, though, is your average net cost would drop to only $10.22 per share, protecting your downside by almost 15% from the trade inception price. MTG gave shareholders opportunities to exit at north of that price during each of the seven years stretching from 2015 right through 2021 year to date. Fundamentals are better now than during most of that entire period. Buy some MTG shares, sell some puts out to Jan. 2022 or even Jan. 2023, or set up full buy/write combinations to try for the most bang for the buck.

It's a Kind of MGIC: This Insurance Provider Is Up, but Still Cheap

MGIC Investment is the industry leader in private mortgage insurance. Here's how to play it.

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