Buy Essent Before It Makes Its Ascent

Until virus-related turmoil hit the market, Essent Group had never done anything but grow. From ESNT's 2014 IPO through 2019, all its major metrics expanded nicely as detailed below. Management even initiated cash dividends for the first time in the third quarter of 2019 and raised the quarterly rate 6.66% in Q1 2020. The shares established an all-time high of $55.84 last November as they were concluding their best year ever. Panic selling in late March took ESNT down momentarily to an astonishing low of just $17.52. As of Friday, ESNT had partially rebounded to $30.13 and traded up a couple bucks on Tuesday afternoon. Estimates for 2020 and 2021 look for solid profits, but vary widely depending on which analyst you want to believe. Value Line sees earnings per share of $3.90 this year, then a jump to $5.43 in 2021. The 12 analyst consensus on Yahoo Finance are more optimistic. Their mid-point estimates run $4.94 and $5.69 respectively. Whichever numbers you want to go with, ESNT appears extremely undervalued. Using Value Line's more conservative numbers puts the shares at just 7.7-times 2020's already reduced projection and less than 5.6-times its 2021 estimate. Those compare very favorably with ESNT's 2014 to 2019 average multiple of 12-times. Even a partial valuation rebound to 10-times Value Line's estimate could send ESNT back up to north of $54 by Dec. 31, 2021. Yahoo Finance, too, calls ESNT undervalued. It sees the stock back near $44 by this time next year, implying greater than 45% upside plus any dividends received. Note that ESNT, unlike many other companies, maintained its quarterly payment. The next ex-dividend date is June 1 with payment scheduled for June 12. The current rate is a respectable and sustainable 2.12% based on a $30.13 quote. Independent research house Morningstar also sees Essent Group as worth much more than it's now selling for. It calls present-day, as opposed to year ahead, fair value as $41.36 per share. Simply reverting back to that modest goal would deliver greater than 39% in total return if it takes a full year to achieve. Are those target prices rational? You bet they are. They will probably prove too conservative. ESNT gave traders chances to exit at between $47 and $55 during each of the past four years, including 2020 year-to-date. Director Robert Glanville obviously didn't see the Covid-19 share price damage coming in advance. He purchased 1,000 shares on Feb. 25, at $46.50, then averaged down on another 1,000 at $38.58. He was clearly seeing the company's solid future prospects when he made those buys. We can now own ESNT substantially cheaper than his prices. Option-minded traders can play ESNT via shorting of its Jan. 15, 2021 expiration date puts at $30, $35 or $40 strike prices. Premiums are generous and margins of safety look good as shown below (with ESNT at $30.13). Worst-case forced purchase prices dropped to either $24.10, $26.10 or $27.40 depending on which strike was selected. Maximum profits on these, or any other, option sales always equals 100% of the money collected up front. In these examples that would equate to $590, $890 or $1,260 per 100-share commitment respectively. Depending on where ESNT closes next Jan. 15, you'd either buy at what looks like bargain levels, or get paid well without ever having to own the shares at all. Owning ESNT at any of the three break-even points would get you in below the absolute lows during calendar years 2017 through 2019. Essent Group is a proven growth company at a ridiculously cheap valuation. Buy some shares, sell some puts or consider doing both.

Buy Essent Before It Makes Its Ascent

ESNT is a growth stock at a better-than-reasonable price right now.

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