Reasons For The Decline
- Over the past three months, the S&P 500 (SPY) is down nearly 5%. While there has not been a major sell-off, the negative move in the averages has played a role in the sell-off of the mortgage insurers.
- The financial sector as a whole has been under more pressure for a variety of reasons. Some important issues weighing on financials have been the trading loss at JP Morgan (JPM), and the government sale of American International Group (AIG) stock. The problems with the European financial system have also led to increased selling in financial shares. While none of these issues have a direct impact on the mortgage insurers, these issues have tempered the enthusiasm for investing in financial companies in general.
- GNW has been recently downgraded by Credit Suisse (CS). Also, GNW's CEO Michael Fraizer unexpectedly announced his resignation. Both of these events have hurt GNW.
- RDN Q1 earnings dissapointed Wall Street. More concerning, RDN said that its mortgage insurance unit would likely breach regulator set risk levels in the second half on the year. This news was a major negative for RDN as the company will likely need to raise more capital.
- Like RDN, MTG also reported a dissapointing quarter. A legal dispute has also arisen between MTG and Freddie Mac with MTG filing a lawsuit last week.
While these concerns are all valid, the valuation of these companies is still compelling.
Price To Book
- GNW: 0.17
- MTG: 0.42
- RDN: 0.27
Wall Street is also betting heavily against both MTG & RDN .
- MTG: 17.7%
- RDN: 23.4%
If any positive news comes out, it is likely that these stocks will launch higher as shorts look to cover.
While the sharp decline in this sector over the past three months has been massive, the fundamentals are not strong enough to get behind these stocks even at these levels. Clearly, these companies have not benefited as much from the improving housing market as some investors had hoped. That being said, because of the valuation, it does not make sense to sell these stocks at these levels either. I believe the best way to play these stocks is to wait and see how the next couple quarters play out before making a decision.