Genworth: Possibly The Best Way To Benefit From A Turnaround In Housing

| About: Genworth Financial, (GNW)

Warren Buffett has made billions of dollars for himself and his shareholders by making investments at cheap valuations. He simply buys undervalued stocks and holds them for the long-term. In order to buy bargains, Mr. Buffett and contrarian or value investors often buy when others are taking an overly negative view on a certain stock or sector. Recently, Mr. Buffett has been making large investments into real estate related stocks and he has said that the housing market is poised for recovery. Mr. Buffett is adding more housing exposure by making a $3.85 billion bid for a mortgage loan portfolio from Residential Capital LLC. A recent Bloomberg article stated:

Foreclosure filings in the U.S. have fallen on an annual basis for 20 straight months, according to RealtyTrac Inc., and home prices jumped 1.8 percent in March, the biggest monthly increase in at least two decades, as record-low mortgage rates and a dwindling inventory of properties available for sale strengthened demand. Buffett's Berkshire Hathaway Inc. (NYSE:BRK.A) has prepared for a turnaround by buying a brickmaker, expanding its real estate brokerage and wagering on commercial property through a company jointly owned with Leucadia National Corp. (NYSE:LUK).

There are many ways to invest in assets that could benefit from a turnaround in housing and Genworth Financial (NYSE:GNW) could be one of the best ways to play it. While some investors could pick some of the housing-related stocks that Mr. Buffett has been buying or just buy shares of Berkshire Hathaway (NYSE:BRK.B), it could also be highly-rewarding to invest in Genworth shares, especially since a case can be made for the stock to triple in value in the next couple of years. With Mr. Buffett making a big bet on mortgages, it might be time to also bet big on select mortgage insurance companies.

Genworth Financial, Inc. is trading for about half off of the 52-week high. It's also trading for about 6 times earnings and way below book value which is $30.02 per share. The worst appears to be over for the mortgage insurance industry and Genworth. Most likely, this company will continue to earn profits, (even if depressed by mortgage losses), until the housing market sees a stronger recovery. The company also sells annuities, long-term care insurance and other financial products, which helps to boost profits and keep the company diversified.

Let's consider the risks: We could fall off the fiscal cliff, and have another recession, but that doesn't necessarily mean that housing will see a big drop. With 30-year fixed mortgages at about 3.5%, it's cheaper to buy a home than rent in most areas. Also, investors are buying properties now because rents are rising. In many regions, multiple offers are back and all-cash deals are happening too. The point is, even if the economy remains weak or gets weaker, the effects of a downturn will be minimal or even a non-issue for the housing market in comparison to what has already happened.

When evaluating risks it's important to consider the risk to reward ratio and it looks like Genworth has about $3 to $4 worth of upside for every $1 worth of downside. For example, if the world ends tomorrow, Genworth has about $5 left in downside, but if the world doesn't end and instead muddles through serious challenges as it always has, the stock could be $15 or more. There is no doubt, that just as in the last crisis, many will look back and regret not buying incredibly cheap assets due to the excessive fear in the market. I believe years from now many will be sorry for not buying stocks like Genworth. It is cheap based on every metric, and profitable even in a tough economy.

Another big plus: It's important to note that multiple insiders bought Genworth shares after the stock dropped in May. For example, on May, 7, 2012, James A. Parke (a director) bought 25,000 shares, in a transaction valued at about $140,000. On May 20, 2012, James S. Riepe, (a director) bought 45,000 shares in a transaction valued at about $225,450. Unless the worst-case scenarios play out in the economy, buying Genworth now is likely to reward investors who hold for a long-term recovery. With a number of financial and insurance stocks like trading at 10 times earnings, a case can be made for Genworth to trade at about that multiple (especially since it has historically traded for even more). If analyst estimates for 2013 come through at $1.46 in earnings, a P/E ratio of 10 could put the shares near $15 in the next couple of years. At least one analyst has a $16 long-term price target on the stock.

Key Data Points For Genworth From Yahoo Finance:
Current price: $5.15
52-Week Range: $4.80 to $12.55
Dividend: none
2012 Earnings Estimate: 80 cents per share
2013 Earnings Estimate: $1.46 per share
P/E Ratio: about 6 times earnings

MGIC Investment Corporation (NYSE:MTG) is another way to play a rebound in housing since this company also provides mortgage insurance. However, when comparing the valuation of this company to Genworth, it does not look to offer as much value. Genworth is solidly profitable, and is more diversified, while this company has been posting losses.

Key Data Points For MGIC Investment From Yahoo Finance:
Current price: $2.67
52-Week Range: $1.51 to $6.82
Dividend: none
2012 Earnings Estimate: a loss of $1.64 per share
2013 Earnings Estimate: a loss of 49 cents per share
P/E Ratio: n/a due to ongoing losses

CNO Financial Group, Inc., (NYSE:CNO) offers a variety of insurance and financial products which includes health insurance, annuity, individual life insurance, Medicare supplement insurance and other products. While this company does not have the exposure to the mortgage market that Genworth has, the valuation makes Genworth look very undervalued. For example, CNO Financial is expected to earn less than Genworth for the next couple of years, and yet the stock trades at about a 40% premium. By using the same earnings multiple of about 10 that CNO has, and applying that to Genworth's 2013 earnings, it could triple in the next couple of years.

Key Data Points For CNO Financial From Yahoo Finance:
Current price: $7.35
52-Week Range: $4.73 to $8.21
Dividend: 8 cents per share which yields 1.1%
2012 Earnings Estimate: 69 cents per share
2013 Earnings Estimate: 79 cents per share
P/E Ratio: about 10 times earnings

Data is sourced from Yahoo Finance.

Disclosure: I am long GNW.

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