If someone is giving you $33 in exchange for $10, you probably will be very skeptical and think it could be a scam. Similar to a stock that is trading at $10 and its book value is $33. You would have to think either the company is a fault or the business is fading fast. What about if I tell you the company actually is growing and the business is expecting to continue making positive earning. In fact, the EPS is estimated to be increasing more than 18% next year. This company name is Genworth Financial (NYSE:GNW). It is a well established company that was once a subsidiary of GE. According to Genworth most recent 10K, they describe their business as - "We are a leading financial services company dedicated to providing insurance, wealth management, investment and financial solutions to more than 15 million customers, with a presence in more than 25 countries. We operate through three divisions: U.S. Life Insurance, Global Mortgage Insurance and Corporate and Other. Under these divisions, there are six operating business segments. The U.S. Life Insurance Division includes the U.S. Life Insurance segment. The Global Mortgage Insurance Division includes the International Mortgage Insurance and U.S. Mortgage Insurance segments. The Corporate and Other Division includes the International Protection, Wealth Management and Runoff segments and Corporate and Other activities."
So let's look at why Genworth is trading significantly below its book value at current market price ($10.27 as of 05/01/2013 closing). I am still scratching my head as of today trying to explain the reason for such a depressed stock price comparing to the book value. Even when you discount the goodwill and intangible asset from its balance sheet, you still get about $30. The only reason that I can come up with is that they are in the wrong business segments at a wrong time. For the last couple of years, anything will go down if you are associated with real estate and financial industry (think of the headlines "mortgage bailout" and "financial crisis" that we have seen everything day). Unfortunately, 2 out of 3 business segments of Genworth are exactly in these categories. Furthermore, they just reported a subpar earning in the US Life Insurance segment that can be a contributor to the under performance of its stock price.
Although no one should use a single analysis to evaluate a company, I am just going to stick with the most obvious one evaluation method that I mentioned in the beginning - book value. Using this as a starting point, I don't think I need to explain further why it is a compelling investment opportunity. Furthermore, both the real estate and financial sectors in general are expecting to recover from the past turmoil. These will serve as tail winds to support the stock continue its advance and recover to its intrinsic value (or book value in this case). This is further support by the most recent update from the company press release of stating that the US insurance segment is expecting to become profitable within one or two quarters.
I think the "X" factor is going to be the Australia IPO. If they can execute it in Q4 or earlier, the stock will rally. Given the stable real estate environment, I think it is a possibility that they can do that.
With the general mortgage business recovering slowly but surely, Genworth Financial stock price should continue its ascent toward its book value. Given time and patient, I think long term investors should reward handsomely. For disclosure, I am long Genworth in both the stock and options.
Disclosure: I am long GNW.