Make Yourself at Home With This Bargain Stock

I wrote positively about Essent Group about five weeks ago when it fetched just north of $51. It was then down from a recent peak of $55.84. Since then, the company beat Q4 estimates, finishing 2019 with all-time record earnings per share of $5.66 per share, up 18.65% year-over-year. Management indicated confidence last year by initiating cash dividends for the first time, at 15 cents quarterly. This year they boosted that rate by 6.7%, to 64 cents annually. Did that unequivocally good news send the already cheap shares higher? ESNT briefly rallied back to $53, but sank on Thursday to below $47 intraday before closing the week at $48.09. Monday morning's sharp sell-off took the shares down further, to $47.38. That pullback appears simply due to weak market action in response to coronavirus headlines. That virus doesn't figure to harm ESNT, a provider of private mortgage insurance, commonly known as PMI, strictly in the U.S. real estate market. PMI is required by lenders for purchasers of homes who put less than 20% down. Home buyers in that category can't refuse PMI. It is mostly sold by realtors as part of the package of services they supply due at closing. As such, it is not price sensitive, making for lush margins. New PMI purchases are tied to the general level of home sale transaction in America. That's a number destined to grow over time, which bodes well for ESNT. Essent Group's final numbers from 2013 through 2019 are shown below. The company made both underwriting profits and investment income during each of those seven years. EPS grew an astounding 708.5% cumulatively. The stock did well, delivering 92.8% in total return, but gained nowhere near as much as was justified on such outstanding growth. That discrepancy leaves plenty of room for a significant catch-up move higher. ESNT's average price-to-earnings since the end of 2013 has been about 12.1-times. From just 7.2-times this year's estimate, and now sporting a 1.44% yield, even a partial valuation reversion-to-the-mean could send ESNT shares up to north of $67. Reaching that goal would provide greater than 42% gains, plus any dividends earned along the way. Yahoo Finance is only slightly less bullish on ESNT than I am. It also calls the shares undervalued, but hold out for just $61.90 by this time next year. Hitting that target would still be worth 28.9% plus dividends for a greater than 30% total return if ESNT takes a full year getting there. Companies in this field are often valued using price-to-book value ratios. Back in 2013, just after its IPO, Essent Group sold for as high as 263% of book value. Its average P/BV was 184% over the full past seven years. A projected Dec. 31, 2020 book value of around $36 could easily support a $66.24 year-ahead price target, solidifying my P/E-based projection as reasonable. Oct. 16, 2020 expiration date options started trading this week. Selling $45, $50 or $55 puts or buying Oct. 16 $50 calls would appear to be option-based alternative ways to play ESNT's expected share price turnaround. The graphic below shows actual pricing on ESNT's Oct. 16 $50 call and $50 put on Feb. 24, 2020 with the shares at $47.38. Selling $50 puts at $5.90 offers a worst-case entry point of just $44.10. That's 6.9% its already cheap valuation. The best-case scenario on this option sale would be keeping 100% of the premium received without ever having to buy the stock at all. In this example that would represent a $590 gain per 100-share commitment. Essent Group spent most of the past 10-months hovering between $46 and $60 dollars. It's remained over the $44.10 break-even price about 98% of the time dating back to April of 2019. Paying $3.40 per share for the right to own ESNT for $50 through Oct. 16 is a bit more speculative play than selling $50 puts. You'd need to see the shares close at $53.40 by expiration day just to break even. That $6.02 rise represents a 12.7% gain from today's quote. If ESNT should rebound to $60 by then, though, those $50 calls would be worth at least $10, resulting in a 194% gain. At $65 the profit would zoom to a minimum of 441.1%. Bad markets make for good values. ESNT appears immune to the effects of the coronavirus. Plain vanilla investors should consider buying some shares outright. Conservative option traders might wish to sell some Oct. 16 expiration puts. Speculative players might end up doing best of all by taking more risk through purchase of call options. No matter how you slice it, ESNT's exceptional track record makes it a top choice for those with six- to 12-month time horizons.

Make Yourself at Home With This Bargain Stock

Essent Group provides private mortgage insurance, commonly known as PMI, and now it's at a great price.

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