Four Reasons Radian Group Is Headed Higher

We recently wrote about Mortgage Finance companies as potential targets for some major upside. We screened all the companies in the sector looking for potential buy candidates and came away with one: Radian Group (RDN).

Radian Group is a leading provider of credit enhancement for the global financial and capital markets. RDN evaluates credit risk, provides products and services in mortgage insurance, public finance, structured finance, reinsurance and other financial services help clients and investors manage risk.

Like many stocks that have anything to do with mortgages, this stock has been beaten down like Roy Jones Junior against Joe Calzhage. The 52 week range is $14.46 to 70 cents. Currently the stock trades at a hair below $4 per share.

There are four reasons we believe RDN is worth your consideration.

1. As we mentioned before, our technical analysis revealed a buy signal for the Mortgage Finance Sector.
2. RDNs chart also produced two buy signals.
3. While the company does have its share of financial difficulties, its valuations on a few levels gives us hope for a turnaround or possible takeover when market conditions improve..
4. Taxpayer money is coming the sector's way, you can count on it.

Technical Analysis of the Mortgage Finance Sector 

The sector has been bludgeoned during the last year. The Mortgage Finance chart recently had a positive MACD crossover under ZERO, usually a reliable buy signal. As depressed as the sector has been, we believe the darkest days are probably behind us and the light we see is the end of the tunnel and not an oncoming train.

Technical Analysis of Radian Group’s Chart

Positive RDN Valuations

Fundamentally, there is very little to like with Radian, they are in a difficult environment and losing money faster than broken down horse players betting on three legged ponies. That being said, there are two valuations that jump off the page to us. First, RDN’s book value is around $29 per share. That makes its $4 price tag look attractive. Second, RDN trades at only 0.18 times sales. That means Radian does 5 times more in revenue than the entire value of all its shares outstanding. Again, it gives us hope, and that’s in now, don’t you know?

Taxpayer Money is on the Way

The bailout bonanza net is widening and catching all kinds of fish: Banks, Automotive Manufactures and now Mortgage Companies have their place in line. A new mortgage assistance plan announced by the Federal Housing Finance Agency is expected to takes effect on December 15. The plan calls for borrowers to get reduced interest rates or longer loan terms to make their payments more affordable. And this is just the start as “critics” say… you guessed it, “it’s not enough.”

When you add it all up, the sum of the parts brings us to one conclusion: RDN’s share price is headed higher in the near-term. We believe the stock will at least test its 200 day moving average of $4.55. That’s nearly a 26% return from its current price. A close above the 200 day moving average would probably push the stock into the $5.70 range, a 46% return. Those numbers can go a long way in repairing some of the damage done to many portfolios.

Suggested Stop: $2.93

Disclosure: Author holds a long position in RDN

Comments

[weiwentg:]

I'm not convinced that Radian's services are essential to the muni bond market or that Radian is structurally important. Given this, I don't think taxpayer money will be on the way. Even if the Treasury bails them out, that doesn't guarantee current equity holders any sort of value. Additionally, their sales will decrease substantially and their present book value is suspect. Investing in Radian would be speculation, and you haven't convinced me that there is any long term value. The best you might be able to do is trade the stock around, and that's not something I'm prepared to do.

2008 Nov 12 03:03 PM

[Ishortyou:]

well the only thing i can say about radian is that if they insured mortgages they are proly going to be ok, because banks won't lend unless the mortgage is insured other than that I dont see much more things positive.

2008 Nov 12 05:59 PM

[MAKORisk:]

2 points. Point 1: RDN's financial guaranty biz is in runoff, with the hope that its healthy (no ugly, ABK-like exposures) cashflow will suffice to fund rising losses in core mortgage guaranty biz. But FG is regulated insurance co. in NYS, and Ins. Dept. will be very grudging about allowing cash to be upstreamed, Result is unpredictable race between mortgage insurance losses and financial guaranty dividends. Point 2. Mortgagor relief measures are two-edged for mortgage insurers. They will reduce risk of defaults (and therefore losses) on existing exposures, but by same token they reduce/eliminate need for insurance. Since insurance premium is typically addon to mortgagors' monthly debt service payments, result may be to cut off insurance and therefore revenue flows to insurers. Again, result may be unpredictable race between freeing up capital vs claims on (worst/riskiest) risks that remain.

2008 Nov 13 08:34 AM