Shares of MGIC Investment Corp (NYSE:MTG) have fallen by more than 50% over the past five trading sessions after the company reported weaker than expected earnings and said it may no longer be able to write new insurance.
On Wednesday, when MTG shares were in free fall and trading below $1 per share, two notable insiders stepped in to buy stock. Executive Vice President & CFO, J. Michael Lauer purchased seventy-five thousand shares of MTG for 89 cents per share. In addition to Lauer's buy, MGIC Chairman & CEO, Curt S. Culver, purchased one-hundred thousand shares of MTG for 98 cents per share. These insider buys lead to believe that a "very bad event" such as bankruptcy is not likely. Rather, the buying suggests that something positive may be in the works.
Over the past four trading sessions, MTG has traded 53 million, 28 million, 14 million, and 13 million shares, respectively. In total, MTG has 202 million shares outstanding. I believe the volume, the plunge lower in share price, and bad news are signs of possible capitulation.
As of July 13, when short interest was last reported, more than 35 million shares or 18% of the float was sold short. Given the recent decline, it is likely that some shorts decided to cover. However, it remains likely that more short sellers decide to lock in gains with MTG trading at these levels.
Potential Run-Off Value
Even if MTG is unable to write new insurance, it is still possible that the run-off value of the company's current book of business has some value for shareholders. In an interview discussing his stake in MTG, noted hedge fund manager Kyle Bass said "even in a run-off, it's worth more than three bucks." While Bass has proved to be mostly wrong about MTG, as he predicted that it would be the last survivor in the industry, he raises an interesting point about a potential run-off not being the end of MTG.
While I am not sure MTG has a bright long-term future, I think it makes sense, at this price, to speculate by buying the stock for a trade. I have also outlined two other ways to play recent developments for MTG: Most directly, an options play as discussed in an instablog post here. I also believe than investors should consider Radian (NYSE:RDN) as the company is poised to benefit from MTG's recent problems.
Disclosure: I am long MTG.