Genworth Financial Inc., (GNW) shares have doubled in value in the past few months and as the chart below shows, this stock recently hit a new 52-week high and is now at overbought levels. The stock appears to be getting ahead of the fundamentals. Investors might be (temporarily) overlooking the negative consequences and impact that the recent rise in interest rates could have on portfolio values and earnings. However, many investors could become more aware of this, as earnings season is upon us now.
While many investors are aware of the recent plunge in their bond portfolios, it seems that this is being overlooked when it comes to companies that are typically highly exposed to the bond markets. This includes banks and insurance companies like Genworth. The other issue is that the housing rebound could stall in the coming months since the cost of a mortgage has surged in the past few weeks. However, let's go back to the plunge in bonds which just accelerated after the latest jobs report came in stronger than expected. Based on this news the Ten-Year Treasury Bond went from about 2.5% to 2.7%, in just a day or so. This move put significant pressure on all sorts of bonds and that means Genworth and other financial companies that have significant bond holdings could see a drop in portfolio earnings. This issue could impact book value and earnings results in the coming quarters. Plus, it could get worse as some analysts expect the Ten-Year Bond to hit 3% sometime in 2013.
One former FDIC official was warning about this downside risk for financial institutions earlier this year and before the recent drop in bonds. A Wall Street Journal article states:
"The risk of a rapid rise in interest rates presents the biggest threat to the financial system but regulators may be too distracted with the last crisis to adequately tackle new challenges, warned Sheila Bair, the former chairman of the Federal Deposit Insurance Corp.
Ms. Bair said she's worried more about interest-rate risk than any other issue. A significant and speedy rise in rates could produce big losses for individuals and institutions with large bond portfolios and raise borrowing costs across the country."
Insurance companies like Genworth typically have significant bond exposure and the plunge in values is likely to be an issue when the company reports earnings and guidance for the second quarter of 2013, after the market closes on July 30. Earningswhispers.com has consensus estimates at 29 cents per share for this quarter.
The other reason to consider selling now is because this stock is just not the bargain it once was a few months ago. Analysts expect the company to earn $1.14 per share in 2013 and that puts the price to earnings ratio at about 11 times. Not bad, but with a potential slowdown in housing coming and with the potential for big losses in bond portfolios, the easy money appears to have already been made in Genworth.
Here are some key points for GNW:
- Current share price: $12.32
- The 52 week range is $4.06 to $12.32
- Earnings estimates for 2013: $1.14 per share
- Earnings estimates for 2014: $1.39 per share
- Annual dividend: None
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.