FIG trader_

MGIC Investment: Living on Borrowed Time -- Barron's

Barrons is scratching the surface, and they don't know how to value financials. The long/short of this, as I indicated in different posts, is that the market has compressed the valuation substantially over the last five years (as ROE's dropped from mid twenties to teens) and currently is discounting the worst for MTG, as reflected in its 1.26 price/book. If market (or Barrons) is correct in assuming much higher credit defaults, you can hedge the long with short on some other credit (ACF). the reality is the market assumes hard landing for MTG, and soft landing for major US credits. Look at MTG's shareholder equity/assets and "liabilities" (i.e. reserves) and compare it with "banks and credits". The robustness of this ratio suggests substantial capital backing up "un identified future losses). I think it is reporting close to "trough ROE's, and it is the one of few subsesctors (mortgage insurance) offering an upside trade if there is even a partial reversion to mean ROE (perhaps mid to high teens). In worst case, company will be trading at book value in a year and a half, at current earnings rate. The company has been reporting flattish revenues reflecting a contraction of business "levels and changes in the way GSE's do business), but the mortgage insurance model still works (see TGIC, and PMI, as two other alternatives)

MGIC Investment's Book Value Growth Better Than I Predicted

MTG is trading at about a 30% discount to fair value, as long as it doesn't "mess up" meaning, there isn't som massive credit whole; with a low teens ROE, the stock should be at 150% of book value. In fact, pricing will soon start to improve in their business, so the market, which is overly concerned with credit losses is misunderstanding the cyclical shifts and improving pricing and ROE leverage through 2010. I (and Bill Miller; big holder) have been watching them, underperform. I think in this climate, its a good long to pair with a short like ACF (much riskier "credit")