Genworth Financial, Inc. (GNW) announced earnings which were relatively solid, but you would not know that by looking at the share price. The company reported earnings of $76 million, or 16 cents per share for the second quarter of 2012. This compares very favorably to a net loss of $136 million, or 28 cents per share for the same period in 2011. However, it seems that the market did not like management comments on the conference call, which gave pushback to the recently circulated idea that the mortgage insurance division would be a candidate for a spinoff.
There might have been other issues that contributed to what appeared to be an oversized decline in the share price. Reports surfaced that on August 1, about 150 stocks suffered from erroneous trades due to technical glitches, which created major drops and volatility in the shares prices. This was reminiscent of the 2010 "flash crash" when the Dow Index dropped 10%, and it might have exacerbated the drop in Genworth shares, especially since the stock was trading down over 10% at times. Corning (GLW), which has a similar ticker symbol as Genworth, was also down nearly 10% at the lows, with no major news that appeared to account for such a large drop. In days to come more news should be out about the "flash crash" that occurred in many stocks, however, one reliable source already confirms that Genworth was indeed impacted by erroneous trades and this could be what was responsible for triggering an oversized selloff. Unfortunately for some shareholders, this might have caused stop limit orders to be triggered which only led to a cascade lower. But for those with cash available to buy cheap, this is an opportunity.
The sharp drop in Genworth shares has created another solid buying opportunity for bargain hunters. Even if the mortgage insurance division is not ever spun-off, there is major upside potential in Genworth. Here is why contrarian investors should seize the opportunity to buy cheap now:
1) Genworth is profitable! Get over the spinoff potential, and consider the glass half-full approach. This company is managing the challenges it faces and it is still making money, which is not something many other mortgage insurers can say. Every sign points to the fact that Genworth can continue to earn its way out of the challenges it faces. The stock is priced at ridiculous levels that would be more appropriate for a company that is losing money.
2) Genworth's U.S. mortgage insurance division is showing major signs of improvement. The net operating loss improved to $25 million, compared with net operating losses of $43 million in the prior quarter and $255 million in the prior year. The outlook for this company is improving, but this market is full of short-term traders that want the instant gratification of a spinoff, and shorts that are happy to pile on when they see downside momentum. However, in the long run, this company appears poised to continue generating profits, which will add to the book value of the shares. It also has the potential for much higher earnings as the housing market eventually rebounds.
3) While a spinoff might not happen soon or at all for the mortgage
insurance division, investors seem to have overlooked the fact that a takeover of the entire company is still conceivable. Genworth itself was a spinoff from General Electric (GE) just a few years ago, at $20 per share. GE has a major financial services division and it could buy Genworth for a mere fraction the $20 spinoff value, and spin it off again in a few years. Also, GE might not be the only potential suitor. Warren Buffett is a big fan of insurance companies and we know he loves to buy a bargain. Mr. Buffett has been making bullish bets on the housing market recently, and since Genworth is poised to benefit from a housing rebound, it could be the perfect fit for Berkshire Hathaway (BRK-B) to acquire.
4) Although a spinoff or takeover would be very rewarding in the short-term, the biggest gains are probably going to come from a continued improvement in the economy and in Genworth's financial results. Historically, the mortgage insurance business has been very profitable as have Genworth's other insurance product offerings. A day is likely to come when all cylinders are firing at this company and that could mean a much higher share price and even the initiation of a dividend. We are experiencing one of the most irrational and fearful times in the history of investing. In hindsight, these types of opportunities have historically been very rewarding for anyone who bought when there was "blood in the streets" for a specific stock or the market in general. A rational investor who is not blinded by the short-term market expectations for a mortgage insurance spinoff and trading glitches, will clearly see a profitable company with a book value of about $30 per share, that is trading for about 5 times earnings.
Here are some key points for GNW:
Current share price: $4.48
The 52 week range is $4.42 to $9.68
Earnings estimates for 2012: 74 cents per share
Earnings estimates for 2013: $1.38 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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.