SA author Hawkinvest indicates it is time to sell Genworth (NYSE:GNW) after Genworth's recent strong price action. I disagree. The fact that Genworth has strong upward price momentum is not a bad thing, it is a good thing. Although Genworth may pull back a little in the near term, medium and long term Genworth is looking technically strong and Genworth is fundamentally undervalued as it is selling at just .25 to book, 1.1 to cash and 2.7 to positive cash flow, and its forward price to earnings based on consensus analyst earnings estimates is just 6.6. All these things taken together make Genworth a strong buy.
I agree with Hawkinvest that Genworth was much cheaper at around $4 per share but I disagree that Genworth has now somehow gotten expensive because it has doubled off its recent lows. Genworth is still dirt cheap despite its recent run-up to around $8 per share. I also disagree with Hawkinvest when he states that Genworth's strong price action is a bad sign. Quite the contrary, I believe that strong price action and price momentum are good signs and that an investor will make more money buying stocks at 52 week highs than buying stocks at 52 week lows. Never forget, the trend is your friend. Do not fight the price action. If a stock is trending upward, ride it up for all it's worth. Correlatively, if a stock is trending downward, avoid it, or short it, because the trend is likely to continue. Price action is the ultimate arbiter of truth in the markets, regardless of what the analysts and pundits argue about what the price of a company should be. Of course use stops in case the trend reverses, but that is less likely than that the trend continues. It is Newton's fundamental law of motion that an object in motion tends to stay in motion and tends to stay moving in the same direction unless acted upon by some outside extraneous force. So use the inertia and the momentum of a stock in your favor rather than trying to fight it.
Furthermore, not just the price momentum but the fundamental metrics of Genworth are quite strong. Genworth is estimated to earn $1.26 per share next year and about $.25 cents a share next quarter, compared to earning just $.61 cents a share in the trailing twelve month period. Genworth is thus more than doubling its earnings per share year over year (104% year over year earnings growth). Genworth's current P/E of 13.66 is projected to move lower to 6.6 based on forward year earnings estimates. Genworth's price to sales is just .4. Genworth's price to book is just .25. This means that even if Genworth liquidated its business' assets and had no future cash flows or operating income it would return more to shareholders than its current share price of $8.04. Genworth's book value per share is about $32. In fact, Genworth has $7.61 per share in cash on its balance sheets which almost consumes its entire market capitalization. Genworth's price to free cash flow is a very low 2.6. So I think Genworth is still a strong buy.
Incidentally, I also agree with Hawkinvest that MetLife is fundamentally undervalued and is a strong buy at just P/B .6, P/C 2.32, P/FCF 2.78, P/S .58, and f P/E 6.83. Not just Genworth and MetLife, but I believe, judging by my research into the fundamental operating metrics of companies like AIG and Lincoln National (LNC), the insurance industry as a whole is quite undervalued. I would prefer life and health insurance companies to property and casualty insurance companies, however, given the trend towards larger and more frequent natural disasters we have witnessed of late, which some attribute to the effects of supposedly man-made global warming. But that is a whole other discussion which I do not have time to get into here, other than to refer readers to google "milankovich cycles".
Despite the fact that Genworth has strong price action and price momentum and strong fundamentals, what happened Tuesday? Genworth at one point was down about 6%. This was solely because one analyst at Credit Suisse decided to downgrade Genworth from neutral to underperform due to risks over its long term care insurance segment. I have found that analysts are more often wrong than right in their predictions so I don't put much stock in an analyst downgrade like this, but obviously the market did today. But I believe that this was just a short blip on the path higher for Genworth. My price target for Genworth is at least $15 per share within 2-3 years as Genworth is likely to double due to improving and growing earnings and the positive uptrend in housing which will help Genworth's mortgage insurance segment especially in the next 2 to 3 years.
Check out GNW's chart below, sourced from finviz.com:
Disclosure: I am long GNW. 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.