Seeking Alpha
Long/short equity, contrarian, research analyst, portfolio strategy
Profile| Send Message|
( followers)  

Over the past month, as shown by the chart below, shares of mortgage insurers MGIC Investment Crop (NYSE:MTG) and Radian Group Inc (NYSE:RDN) have surged higher with MTG leading the way.

MTG ChartMTG data by YCharts

Share Offerings

It is quite interesting to note that both RDN and MTG have come to market with large stock offerings over the past few days. RDN was the first mover raising $300 million from a 39.1 million common stock sale and 389.8 million from a convertible note offering. Soon after, MTG followed suit announcing a 135 million common stock sale and $350 million convertible note offering. In total, MTG plans to raise about $1.2 billion from the combined offerings. The fact that these companies are raising capital does not come as a surprise as both RDN and MTG have been on shaky financial footing due to large losses. However, the fact that both stocks reacted by moving sharply higher comes as a surprise. Normally, when companies issue shares, the stock price falls as the supply of shares increases substantially. Without question, the price action indicates that both MTG and RDN want to move higher.

Volume Surge

As shown by the chart below, both RDN and MTG have experienced a surge in volume over the past few weeks.

MTG ChartMTG data by YCharts

The surge in volume may indicate something of a short-term capitulation to the upside for both stocks. Simply put, a lot of money has come into both RDN and MTG over the past few days and the buyers are likely getting tired. This does not mean that I expect MTG and RDN to trade sharply lower or that the move higher is over. Rather, I would expect RDN and MTG to spend some time consolidating in a trading range.

Radian Expects A Return To Profitability in 2013

In its most recent earnings release, RDN said it expects to return to profitability in 2013. This news comes as the company reported yet another quarterly loss, this time $177 million or $1.34 per share. However, the market, as it should be, is focused on the improving outlook. It seems as though the improving housing market is finally starting to help RDN.

MGIC Reports Loss, Settles Dispute With Freddie

In late February, MTG, like RDN reported a significant loss for its most recent quarter. However, like RDN, MTG also had good news for investors coming in the form of a formal settlement with Freddie Mac.

Short Interest

It remains to be seen how much of the recent rally can be attributed to short covering. When short interest was last reported, Feb 15, 2013, both MTG and RDN had significant short interests. However, it is possible that shorts have played a part in the recent rally.

Conclusion

I am maintaining my long-term bullish outlook for both MTG and RDN. However, I would not buy shares right now. Investors should look to buy either MTG or RDN on a significant pullback or after both stocks have gone through a consolidation period. Warren Buffett has said, "It is good to be greedy when others are fearful and fearful when others are greedy." Over the past few months, for MTG in particular, the pendulum has swung from fear to greed. In late 2012, MTG shares were trading below a dollar and many were fearful about the future of the company. At the time, I stepped up and bought as others were fearful. Currently, with shares trading close to $6, I cannot be as bullish as I previously was, especially for the short term. That being said, I am optimistic that the recent moves made by both RDN and MTG to raise capital will benefit both companies over the long term. More simply stated, long-term holders should maintain positions in RDN and MTG but short-term traders should be more cautious as a significant pullback is possible given the speed and strength of the recent rally.

Source: MGIC And Radian Surge: Updating My Outlook