3 Reasons Why Genworth Is Heading Higher

| About: Genworth Financial, (GNW)
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Genworth Financial, Inc. (NYSE:GNW) shares have been on a roller-coaster ride for the past few weeks, but lately, they have been rising, and it looks like the stock has a substantial amount of upside momentum left. That is why a strategy to buy the stock on dips could be rewarding for investors with a mid- to long-term view.

Genworth has a range of financial products that include: mortgage insurance, annuities, long-term care insurance, and others. Naturally, the mortgage insurance business has created losses for most companies in this sector, including MGIC Investment (NYSE:MTG) and Radian (NYSE:RDN). However, Genworth could be the best-positioned company in this industry because it is one of the strongest and also because it has other offerings that offset mortgage insurance losses. This diversification has allowed the company to report profits, while some of the weaker players have been reporting losses.

While the company has had some disappointing news this year, such as a postponement of a planned IPO for its Australian mortgage insurance unit and the resignation of the CEO, those issues appear to be just short-term bumps in the road to what could be strong gains in the future. Here are a few reasons why Genworth shares should be bought on dips, and why the stock has significant upside potential:

1. The shares are just too cheap to ignore. The stock is trading at just about 7 times earnings estimates for 2012, while the average stock in the S&P 500 trades for about 13 times earnings. Furthermore, Genworth's book value is around $30 per share, which is another major sign of undervaluation, since the shares trade for about $5.

2. Recent data points show that the housing market may have bottomed out. Home prices are rising in many areas, new home demand has increased, and many home building stocks have been in rally mode. Also, a recent article states that mortgage delinquencies are declining, it says:

"Credit reporting agency TransUnion last week reported that mortgage delinquencies, holders behind payments by 60 days or more, have fallen to 5.49 percent in the second quarter, down from the 5.78 percent in the first quarter. The agency anticipates the delinquency rate to continue to fall this year, but not below 5 percent."

3. Some top investors are finding value in Genworth shares. Highlands Capital Management recently announced it has taken a 5.2% stake in the company. Highlands filed with the SEC that it seeks to have discussions with management that could lead to the sale or spinoff of certain assets or businesses that Genworth owns. Also, it was recently disclosed that top investor, David Einhorn, took a stake in Genworth shares, and that could cause others to buy in the coming weeks.

Key Data Points For Genworth:

  • Current price: $5.25
  • 52-Week Range: $4.06 to $9.68
  • Dividend: none
  • 2012 Earnings Estimate: 69 cents per share
  • 2013 Earnings Estimate: $1.28 per share
  • P/E Ratio: about 7 times earnings

Data is sourced from Yahoo Finance.

Disclosure: I am long GNW.

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.