Genworth Financial Inc., (GNW) shares have surged in the past few months and the stock is even starting to look like a momentum play. Not long ago, investors soured on this stock and it hit a 52-week low of $4.06 on August 2. There were a number of reasons to be concerned since the company had released news earlier in the year that appeared worrisome. Genworth had cancelled a plan to spin off its Australian mortgage insurance unit, and it also announced the resignation of its CEO. If that weren't enough, a credit ratings agency said it might cut the ratings for Genworth and that could raise borrowing costs. With so many negatives, it was reasonable for the stock to drop, but going down to about $4 was clearly an overreaction. However, investor sentiment has seen a tremendous shift and the stock has doubled and now trades for about $8.30 per share. While the stock has a long-term upside, it's hard to get excited about the valuation and it makes little sense to "chase" the stock after the major recent rally.
The biggest reason for the big jump in the share price seems to be coming from signs that the housing market has hit bottom. Recent economic data has also shown that the worst might be over for the jobs market as well. This has fueled a major rally in homebuilding stocks, which now also appear extended and that rally has spilled over into the mortgage insurance sector, which has taken Genworth and companies like Radian (RDN) to new recent highs.
I used to consider Genworth one of the cheapest insurance stocks in the market. Analysts expect it to earn about $1 per share for 2013, and when it was trading at just around $4, that put the PE ratio at just four times earnings. But now, the stock is not so cheap and it is possible to buy other insurance stocks like Metlife (MET) for a lower price-to-earnings ratio. That means other companies might now be a better buy, especially since challenges remain for mortgage insurers and companies that sell long-term care insurance (since people are living longer than expected in many cases). Low interest rates also make it tough for insurance companies to generate returns and that is not likely to change anytime soon. Genworth shares have a 50-day moving average of $6.36 and the 200-day moving average is $5.87. At $8.30 per share, the shares look extended today, and while I have liked Genworth at lower prices, the easy money has probably been made. In a general market or company specific correction in this stock, the shares could easily lose a significant portion of the recent rally to around $7 per share or less. That's why it is time to wait for pullbacks before investing in this stock. Investors with a shorter-term outlook should consider taking profits now and buying back after the stock cools off.
Here are some key points for GNW:
Current share price: $8.30
The 52-week range is $4.06 to $9.68
Earnings estimates for 2012: 68 cents per share
Earnings estimates for 2013: $1.26 per share
Annual dividend: None
Data is sourced from Yahoo Finance. No guarantees or representations
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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