Genworth (NYSE:GNW) appears to be a good buy and appears to be undervalued by the current market. Genworth stock has been beaten down by those who argue it is a value trap. Although Genworth may be facing some challenges such as the bad economy which has reduced available money to buy insurance, threats of a downgrade by credit rating agency Moody's to below Baa3, and substantial numbers of homeowners who default on their mortgages (which causes losses to Genworth's mortgage insurance line of business), there are 10 fundamental reasons why Genworth is undervalued and will likely rise substantially in the next 12 to 24 months.
Take a look at Genworth's chart sourced from finviz.com:
(1) Although Genworth's trailing P/E ratio is 10.4, Genworth's forward P/E is only 4.1. Investors should care more about the forward P/E and forward growth prospects of a company than they care about backward-looking metrics. A forward P/E of about 4 means that if Genworth's earnings stay roughly the same for the next 4 years, if you buy the stock right now, you will have got the stock basically for free after 4 years' worth of earnings. Of course the earnings could go down during the next 4 years (which would make the 4.1 fP/E metric somewhat deceptive), but the earnings also could go up during the next 4 years (which would make the forward P/E even lower than the already low 4.1). Based on earnings growth per share projections from finviz, earnings per share growth for the next 5 years is projected at roughly 13% per annum, which would indeed make Genworth even cheaper than it's 4.1 fP/E.
(2) The Price to Sales ratio for Genworth is only 0.25. This means that Genworth has 4 times more sales volume per year than Genworth's market capitalization. For Genworth, the current market is saying that the entire company is worth just $2.56 billion. Of course total sales volume is different than actual earnings but it does lend support to the thesis that Genworth is undervalued by the current market. If Genworth management continues to perform on par, Genworth appears to be highly undervalued.
(3) The Price to Book ratio for Genworth is only 0.16. This means that the current market is only valuing the shares of the company at about 16% of what the company is worth if it were liquidated. This would appear to be a substantial undervaluing of the company. The market is basically saying it believes that Genworth is worth more liquidated than it is worth as a going concern. This is generally the case when the current market believes that the company will have net operating losses into the foreseeable future, as opposed to net operating profits. However, judging by analysts' projections, the company does not appear to be in the position of losing money each year. For mean analyst projections see here. In fact, earnings per share next year are projected to be $1.27.
Also the Fed's large scale purchases of mortgage-backed securities has caused interest rates on mortgages to hit all time lows and mortgage interest rates will continue to fall which will increase affordability. As Wells Fargo & Co. senior economist Anika Khan said, "We've already seen low mortgage rates even before the Fed action. We'll continue to see mortgage rates come down. That means affordability will continue to be high." This trend will be an economic tailwind to Genworth's business, a segment of which is mortgage insurance, as more people are buying homes and obtaining mortgage insurance, and as fewer people are defaulting on their home loans as the housing market continues to improve and home values are going up. Genworth is a buy right now because it is a good play on the improving housing market trend. See the recent article here. Also, you may want to purchase the recent Paragon research report on Genworth, or you can access it for free by registering on their site. Basically their research report offers a very positive portrait of Genworth and they say Genworth is currently being very undervalued by the market.
(4) The Price to Cash ratio for Genworth is only 0.66. This means that the current market is valuing the shares of Genworth at about 66% of its' cash. Genworth has cash per share of $7.88 while the stock is valued at only $5.21 at the time of this writing. It would again appear that the stock is undervalued and that the market is believing that Genworth is worth more liquidated than it is as a going concern. This seems crazy, but please remember the old barb "the market can remain irrational longer than you can remain solvent" before you run out and put all your retirement money into Genworth's stock. Also remember that just because a company is undervalued doesn't mean it can't get even more undervalued.
(5) The Price to Free Cash Flow is about 1. This means that the current market is valuing the shares of Genworth at about 100% of its' free cash flow. As a measure of value, it is difficult to find a stock with a price to free cash flow ratio of 1. It would again appear that Genworth shares are substantially undervalued by the current market.
(6) Genworth has a debt to equity and long-term debt to equity ratio of 0.5. This is a quite manageable level of debt, as Genworth has twice as much equity value as debt.
(7) Institutional ownership of Genworth is about 80%. This means that the investment is considered fairly safe and reasonable, as large institutions usually do not make very risky and unsafe bets, and as insurance companies are usually considered rather conservative investments. Also, if you put any stock in the notion that institutional investors are smart money and individual retail investors are dumb money, this high level of institutional ownership is a sign that investing in Genworth is probably not a dumb money move.
(8) The mean target price among analysts covering Genworth is 7.5. This means that you stand to make about a 30% profit on your investment if Genworth hits the target price. Of course, it may take a year or two before Genworth eventually hits 7.5, but for most investors a 30% profit is quite good. And if a 30% profit is not enough for you, you can buy call options. I recommend buying the January 2014 LEAPs to give you enough time to be right.
(9) The short float of Genworth is only 1.9%. This is quite low, another sign of value. This means that very few people (only 1.9% of all investors in Genworth) are crazy enough to short such an undervalued stock. The downside of this though is that the stock will not rocket higher due to a short squeeze. If it goes up, it will tend to go up more steadily over time, not as suddenly as stocks with a high short float.
(10) The last but not the least reason why Genworth is a good value stock is evidenced by the fact that legendary value investor David Einhorn has recently begun accumulating a position in Genworth. I would recommend doing the same, that is, dollar cost average into Genworth, don't buy all your stock at one time. Dollar cost averaging is a method of temporal diversification whereby you buy say 25% of your position now, another 25% of your position next month (or next quarter or next year or whatever time increment you think best), another 25% later, and another 25% even later. This tends to smooth out the large fluctuations and gyrations in a stock's price that happen over time, which is usually a good idea given how difficult it is to time your trades (considering for example geopolitical events completely outside your control that can blindside you).
Overall, my research leads me to believe that Genworth is a great value stock and will be moving substantially higher.
Disclosure: I am long GNW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.